Chemical Sector Analysis

OFFICE OF TECHNOLOGY POLICY
MEETING THE CHALLENGE:

U.S. INDUSTRY FACES THE 21ST CENTURY
THE CHEMICAL INDUSTRY
Dr. Allen J. Lenz

Director, Economics
Chemical Manufacturers Association
and
Dr. John Lafrance

Office of Technology Policy
Technology Administration
U.S. Department of Commerce
U.S. Department of Commerce

Office of Technology Policy
January 1996
The U.S. Chemical Industry 1

U.S. CHEMICAL
OFFICEINDUSTRY
OF TECHNOLOGY
FACES THE
POLICY
21ST CENTURY
TABLE OF CONTENTS
PAGE
FOREWORD .......................................................................................... 5
ACKNOWLEDGMENTS ........................................................................... 7
EXECUTIVE SUMMARY .......................................................................... 9
I. INDUSTRY CONDITION ......................................................................... 13

Structure and Characteristics of the Industry ..................................... 13
A Keystone Industry ........................................................................ 13
Huge, High-Tech, and Dynamic ..................................................... 19
Over 1 Million U.S. Jobs ................................................................... 22
A Global Industry ............................................................................. 23
Capital Intensive ............................................................................... 24
Environmentally Committed .......................................................... 25
Position in World Markets and Trade Performance ........................... 30
Trade Performance and Competition ............................................. 30
Trade Composition by Product ....................................................... 34
Geographic Composition of Trade ................................................. 36
Foreign Investment Performance ................................................... 36
Economic Performance and Financial Position .................................. 40
Revenues and Assets ........................................................................ 40
Investment Trends ............................................................................. 41
Profits .................................................................................................. 43
Rates of Return .................................................................................. 44
II. FORCES SHAPING THE INDUSTRY ........................................................ 47

Infrastructure and Sources of Current Strengths ................................ 47
Global Supply-Demand Relationships ................................................. 50
U.S. Economic Performance ................................................................... 52
World Economic Performance ............................................................... 55
Access to Foreign Markets and Protection of Intellectual Property ...... 56
Government Policies ............................................................................... 57
III. COMPETING IN A DYNAMIC WORLD ECONOMY ................................. 59

The Advance of Technology ................................................................... 60
Environmental Costs and Product Restrictions .................................. 66
The Availability of Energy ...................................................................... 71
Changing Geographic Composition of Production
and Consumption .............................................................................. 73
U.S. Chemical Industry Competitiveness and
Foreign Investments ......................................................................... 73
New Foreign Investment Strategies and Problems ............................ 75

IV. MAJOR DETERMINANTS OF FUTURE COMPETITIVENESS ...................... 79

Defining “Success” in the Next Decade ............................................... 79
Critical Industry Choices Affecting International Competitiveness ..... 81
Growth Strategies .................................................................................... 81
Costs of Production ................................................................................. 82
Making the Right Investment Amount and Location Choices ......... 83
Making the Right R&D Amount and Composition Choices ............ 83
External Factors Determining Chemical Industry Competitiveness .... 84
The Domestic Economy and U.S. Policies ........................................... 85
The World Economy ................................................................................ 85
Export and Investment Access to Foreign Markets ............................ 86
Global Protection for Intellectual Property .......................................... 86
U.S. Regulatory Policies .......................................................................... 86
Peering into the Future ........................................................................... 87
BIBLIOGRAPHY .................................................................................... 89
4 The U.S. Chemical Industry

FOREWORD
F or more than a decade, there has been widespread and increasing

concern over the ability of the United States to achieve sustained
economic growth and long-term prosperity. Since 1980, successive Con-
gresses and Presidents, in a bipartisan response, have introduced a wide
range of programs and policies directed toward improving U.S. competi-
tiveness. Such policies — whether focused on building a 21st-century
infrastructure, stimulating technological innovation and commercializa-
tion, improving the business climate for investment and growth, empha-
sizing opportunities for education and training, or promoting trade —
start with assumptions, often implicit, about the competitive position
of U.S. industry.
The Office of Technology Policy commissioned the series, “Meeting the

Challenge: U.S. Industry Faces the 21st Century,” in order to solicit the
view of different segments of the private sector concerning what
policymakers should know about them — their strengths and weak-
nesses, opportunities and obstacles. Drawing principally from the experi-
ence and insight of the private sector, some 150 experts from over 30
organizations in industry, academia, and government have contributed
to the drafting and review of the series. These studies provide a frame-
work for government policy that explicitly reflects the concerns and
perspectives of U.S. industry.
The subject of the first report in this series is the Chemical Industry. It
was prepared under the auspices of the Chemical Manufacturers Asso-
ciation and was broadly reviewed within the industry. It discusses (1) the
structure of the chemical industry; (2) the forces currently shaping the
industry; (3) anticipated industry evolution over the next five to ten
years; and (4) the major factors affecting the chemical industry’s com-
petitiveness. While there is a rich literature concerning the industry, this
is the first collective effort by its members to describe its competitive
status and the first time that so many different aspects of its posture have
been treated together.
Several important insights emerge from this effort. First, it is clear that as
the domestic and other developed markets mature, the chemical industry
will find its greatest opportunities for growth in developing countries.
While this outward focus will involve exporting, it will also make over-
seas investment increasingly important to the industry’s profit base.

Second, to remain competitive in this global industry, chemical manufac-

turers must maintain a technological edge. Thus, the industry must
continue to invest heavily in research and development.
Third, while most of the decisions that ultimately determine growth and
profitability fall to individual firms, government policies will directly
affect the U.S. chemical industry in several areas, including:
■ lowering of trade barriers;
■ access to, and protection for, investments in developing

countries;
■ protection of intellectual property; and
■ maintenance of a climate conducive to innovation, including a

strong U.S. R&D base.
The views expressed are those of the authors and reviewers, and not
necessarily those of the Department of Commerce.
Graham R. Mitchell
Assistant Secretary of Commerce for Technology Policy

ACKNOWLEDGMENTS
A s a part of the fact-finding process leading to the publication of this

report, the Chemical Manufacturers Association (CMA) organized a
roundtable discussion with representatives of the chemical industry.
This discussion was held on July 25, 1995, in New York City.
The roundtable was chaired jointly by Commerce and CMA.
The cochairs were:

Mary L. Good, Under Secretary of Commerce for Technology
Allen J. Lenz, Director of Economic Analysis, CMA
The industry representatives in attendance were:

Harvey E. Bale, Jr., Ph.D., Senior Vice President, International, PhRMA
David J. Deutsch, Chemical Bank
Dr. J. Michael Fitzpatrick, Vice President and Director, Corporation
Research, Rohm and Haas Company
Jasper Ho, Business Analyst, Air Products & Chemicals, Inc.
Frederick M. Peterson, President, Probe Economics
John Roberts, Merrill Lynch
George Sabino, Jr., Ph.D., Director, Business Marketing & Economic
Research, Union Carbide Chemicals & Plastics
Robert Shrouds, Chief Economist, DuPont Co.
Peter H. Spitz, Director, ChemSystems, Inc.
Ronald M. Whitfield, Vice President, Charles River Associates, Inc.
Andrew Wood, Deputy Editor, Chemical Week
In addition, the following individuals generously contributed their

knowledge and insights in the preparation of the report, under
the leadership of Dr. Lenz:
Harvey E. Bale, Jr., Ph.D., Pharmaceuticals Research and Manufacturers
Association
Joel D. Bobula, Pharmaceuticals Research and Manufacturers Association
David J. Deutsch, Chemical Bank
John W. Duren, The Dow Chemical Company
Dr. J. Michael Fitzpatrick, Rohm and Haas Company
Jasper Ho, Air Products & Chemicals, Inc.
Dr. Ralph Landau, Stanford University
Frederick M. Peterson, Probe Economics, Inc.
George Sabino, Jr., Ph.D., Union Carbide Chemicals & Plastics
Ted Semegran, Lehman Brothers

Roger E. Shamel, Consulting Resources Corporation

Robert Shrouds, DuPont Co.
Peter H. Spitz, ChemSystems, Inc.
Ronald M. Whitfield, Charles River Associates, Inc.
Andrew Wood, Chemical Week
The Department of Commerce gratefully acknowledges the participation

and contributions of these individuals.

EXECUTIVE S UMMARY
The Chemical Industry Today
T he U.S. chemical industry is vital to the U.S. economy. It produces 1.9

percent of U.S. gross domestic product (GDP). It is the nation’s
number one exporter. It supplies more than $1 out of every $10 of U.S.
exports and consistently runs large international trade surpluses. It is a
high-tech, research and development (R&D) oriented industry that is
awarded about one out of every eight U.S. patents. It employs over one
million people at wages well above the U.S. manufacturing average, and
it produces over 70,000 different products.
Most importantly, chemicals is a “keystone” industry — one critical to

the global competitiveness of other U.S. industries. Because so many
modern products depend on chemicals, the international competitive-
ness of other U.S. industries requires a high-tech, globally competitive
U.S. chemical industry that can supply new products at prices that give
U.S. producers an edge.
Globalization
Critical to the future competitiveness of the U.S. chemical industry will

be its ability to maintain its technological edge. To do so it must continue
and increase already high levels of investment in R&D and new plants
and equipment (P&E). But in a seeming anomaly, maintaining the com-
petitiveness of U.S.-based R&D and production will require that rising
amounts — and rising portions — of U.S. chemical industry P&E invest-
ment go to foreign countries.
As the chemical markets throughout the developed world mature,

developing countries offer the greatest growth opportunities for U.S.
chemical companies. Foreign markets can be served either by exports or
by investments in production facilities in these markets. Exports from the
U.S. are likely to expand, but increased foreign investments will be vital
to continued U.S. competitiveness in three key ways:
(1) Many important markets cannot be served adequately or

competitively solely by exporting from the United States. To
compete successfully in many foreign markets, companies often
must now produce in those markets, a trend that is likely to
increase.

(2) Producing some products in a foreign market opens the door to

exporting other products to that market and so actually expands
export opportunities.
(3) Ultimately, foreign production and sales expand total sales and
profits, and hence, the base against which R&D and other fixed
costs of U.S.-based companies can be amortized.
The tougher global competition that lies ahead need not signal either the
demise or decline of U.S.-based chemicals R&D and production or a
slippage in the U.S. industry’s exports and trade surpluses.
Rather, a shift in the locus of chemical manufacturing may be the inevi-

table result of rising living standards and rapidly growing production
and consumption of goods in many developing countries. Individual
multinational companies will configure the amount and location of their
production to global market conditions. In a world of increasing capital
mobility, investment capital will flow to those locations that offer the
most attractive investment opportunities. Continued globalization and
expanding foreign demand offer many opportunities, but diversification
of production and expanding global supplies signal a tougher, more
competitive world for the U.S. chemical industry.
Internal and External Factors Affecting Competitiveness
Meeting the rising R&D and P&E investment needs of the future will
require a chemical industry that is profitable and attractive to investors.
While the industry’s profitability will be determined primarily by indi-
vidual company decisions, government decisions that influence the
environment in which U.S. producers compete will also be increasingly
critical to the industry’s continued growth and competitiveness.
Individual companies’ decisions, or internal factors, include growth

strategies, costs of production, and the amounts, strategies, and locations
of both P&E and R&D investments. External factors that affect the indus-
try include:
■ U.S. economic and trade policies;
■ changing international political and economic conditions;
■ export and investment access to foreign markets;

■ global protection for intellectual property; and
■ U.S. regulatory policies.
This report seeks to identify the most important of the many interacting
factors that will determine the future competitiveness of U.S.-based
chemicals R&D and production. To that end, it describes the contribu-
tions of the U.S. chemical industry to the U.S. economy, the structure and
competitiveness of the industry, the key determinants of its current
strength, and the factors most likely to determine its future performance.


I. INDUSTRY CONDITION
Structure and Characteristics of the Industry
T he U.S. chemical industry is a vital element of the U.S. economy.1 The

chemical industry is:
■ a “keystone” or enabling industry, critical to the global

competitiveness of other U.S. industries;
■ huge, high-tech, and dynamic;
■ a large employer;
■ a global industry; and
■ capital-intensive and environmentally committed.
A Keystone Industry
The chemical industry is defined by Standard Industry Code (SIC) 28,
Chemicals and Allied Products. Chemicals, as defined by SIC 28, is a
broad, complex industry that produces over 70,000 different products.2
These products range from the chemicals first derived from the initial
processing of organic or inorganic raw materials — chemicals such as
benzene, toluene, and chlorine that are vital to other production — to
finished consumer products such as medicines, soap, and toothpaste that
are seldom associated with the chemical industry. Production is thus
very diverse. In volume terms, however, most of the industry’s outputs
are basic chemicals little known to consumers. For the most part, its
1
For the purposes of this report, unless otherwise noted, the “U.S. chemical
industry” refers to U.S.-based chemical research and development (R&D) and
U.S.-based production of chemicals. Thus, all the R&D and production facilities
located in the United States, regardless of the nationality of their ownership,
are part of the U.S. chemical industry. The interests of U.S.-based R&D and
production may differ from the interests of individual multinational companies
that have foreign investments. The basic goal of multinational companies is
maximizing global profits, not maximizing their contribution to the U.S.
economy or the economy of any particular nation. But this report’s focus on
U.S.-based R&D and production is consistent with an evaluation of how U.S.
policies affect the industry’s contributions to the U.S. economy and living
standards and to the nation’s competitiveness in world markets.
2
Unless otherwise noted, aggregate data cited in this report cover all of SIC 28.

products are used by other chemical producers to make other chemicals

or by other industries to make or grow things that serve society —
products ranging from apples and autos to zippers and zithers. Never-
theless, much of the public is unaware of the vital role of the chemical
industry in everyday life and modern products.
The many different products and processes of the chemical industry

make a concise but meaningful description difficult. In essence, however,
at the base of the chemical industry are companies that combine organic
and inorganic materials from the earth with heat, air, and water to make
chemicals that, in turn, are essential to products used in everyday life in
modern economies (Figure 1). Box 1 outlines the major components of
the industry.
The production of basic industrial chemicals falls into two broad cate-
gories, organic and inorganic chemicals. Organic chemicals production
begins with raw materials containing hydrocarbons such as oil, natural
gas, and coal. Inorganic chemicals do not contain carbon but are made
from the air and from minerals taken from the earth, such as salt.
The chemical industry’s The chemical industry’s manufacturing processes, however, extend far
manufacturing processes beyond the making of basic industrial chemicals. One useful way to
extend far beyond the describe the industry is vertically — by the layers or sequences of pro-
duction it embraces. As noted above, some chemical companies are
making of basic
involved in the initial transformation of inorganic and organic raw
industrial chemicals. materials into basic industrial or “building block” chemicals (for ex-
ample, chlorine, benzene, ethylene, propylene, xylene, toluene, butadi-
ene, methane, and butylene). Other chemical companies use these basic
or “commodity” chemicals to make more highly refined “intermediate”
chemicals that are essential inputs to everyday consumer products made
by other industries — products such as glass, paper, steel, etc. Another
group of chemical companies may take these intermediate chemicals
and, through combinations and further processing, make “specialty”
chemicals — such as water treatment chemicals — and other products,
such as paints, fertilizers, plastics, artificial fibers, etc.
The immediate economic interests of firms at different “layers” of the

production process may sometimes conflict. For example, an oversupply
of production that leads to depressed prices for some basic chemicals
would be bad news for the producing companies but could be good
news for other chemical companies that must use basic chemicals in
producing their own, more highly refined products.

Figure 1. What Is Chemistry?
The industry can also be defined in rough terms by product groups.

Approached this way, the chemical industry is made up of a number of
subindustries, such as basic petrochemicals, basic inorganic chemicals,
plastics, man-made fibers, industrial gases, fertilizers and agricultural
chemicals, and pharmaceuticals. The Bureau of Labor Statistics maintains
employment data for the industry in an eight-way breakout: industrial
inorganic chemicals; plastics materials and synthetics; drugs; soap,
A large portion of the
cleaners, and toilet goods; paints and allied products; industrial organic
chemicals; agricultural chemicals; and miscellaneous chemical products. industry’s shipments
goes to other chemical
None of these descriptions alone adequately conveys the industry’s companies for further
complexity or the relationships of chemical production and consumption refinement into other
within the industry. But noting the tiers or “layers” of production, it chemical products.
should be recognized that for many chemical producers, other chemical
companies are their best customers. That is, a large portion of the

Box 1. Major Components of the U.S. Chemical Industry

The U.S. chemicals and allied products industry consists of some 9,125
corporations whose primary business is the development, manufacturing,
and marketing of industrial chemicals, pharmaceuticals, and other chemi-
cal products.
The industrial chemicals segment (SICs 281, 282, and 286) of the industry
consists of some 1,725 corporations whose primary business is the manu-
facturing and marketing of alkalis and chlorine, inorganic pigments, indus-
trial gases, and other industrial inorganic chemicals; plastic resins,
synthetic rubber, and man-made fibers; and petrochemicals and other in-
dustrial organic chemicals.
The pharmaceuticals segment (SIC 283) consists of some 1,225 corpora-
tions whose primary business is the development, manufacturing and mar-
keting of medicinal chemicals and botanicals; in vitro and other diagnostic
substances to diagnose or monitor the state of human or veterinary health;
bacterial and virus vaccines, toxoids, serums, plasmas, and other biological
products for human and veterinary health; and vitamins and other phar-
maceutical preparations for both human and veterinary use.
Other chemical products (SICs 284, 285, 287, and 289) consist of some
6,175 corporations whose primary business is the manufacturing and mar-
keting of soaps and detergents; surfactants; specialty cleaning, polishing,
and sanitary preparations; perfumes, cosmetics, and other toilet prepara-
tions; paints, varnishes, enamels, and other allied products; fertilizers, pes-
ticides, and other agricultural chemicals; and adhesives and sealants,
explosives, printing ink, and other specialty chemicals and chemical prepa-
rations.
industry’s shipments goes to other chemical companies for further

refinement into other chemical products. And another large portion —
almost half of the industry’s total output — goes to other manufacturing
industries to enable production of other manufactured goods (Figure 2).
The chemical industry The chemical industry is an enabling industry, a supplier to virtually
supports and makes every other industry. In fact, the food, clothing, construction, health care,
and transportation industries are dependent on chemical industry inputs
possible millions of jobs
(Figures 3A and 3B). Every automobile, for example, contains about
in other industries. $2,200 of chemical processing and products. Thus the chemical industry
supports and makes possible millions of jobs in other industries —
beyond the million-plus jobs it generates directly — by supplying the
products and technologies that enable other U.S. industries to perform
their services, make their products, and develop new ones.

Figure 2. U.S. Chemical Industry Flow Chart, 1994
Developing countries invariably give high priority to building their own This emphasis on
chemical industries because they recognize the keystone nature of this chemicals in the
industry in modern economies. This emphasis on chemicals in the development plans
development plans of industrializing countries has significant implica- of industrializing
tions for the U.S. chemical industry.
countries has significant
Despite its keystone importance to manufacturing, the contributions of implications for the U.S.
the chemical industry to the economy are often not apparent to the chemical industry.
general public, probably because most chemical companies are not
directly involved in the production of consumer goods.
It should also be noted that most chemical companies do not fit neatly
into just one of the tiers or product groups described above. Some large

Figure 3A. Role of Chemicals in Everyday Products
Autos and Trucks Rely on Chemicals
Homes and Offices Rely on Chemicals

companies produce many — if not most — of the full range of chemical

products. Some may produce not only basic chemicals, intermediates,
and specialty chemicals but consumer products as well. Most companies,
however, produce only a relatively narrow range of products.
This layering of production, the diversity of products, and the differing

product orientations of individual companies complicate the collection
and interpretation of data about the chemical industry. For purposes of
this report, however, the chemical industry is generally described in data
presented for three subsectors: industrial chemicals, pharmaceuticals,
and other chemical products.
Huge, High-Tech, and Dynamic

The U.S. chemical industry is the world’s largest. Production by plants in the Production by plants in
U.S. provides about 24 percent of world chemical production (Figure 4). the U.S. provides about
Japan is the second-largest producer — about 16.6 percent of the world total 24 percent of world
— followed by Germany and France with 7.9 and 5.2 percent, respectively, of chemical production.
total world output. U.S. chemical industry shipments of more than 70,000
different products reached $341 billion in 1994. On a value-added basis the
industry provides about 1.9 percent of U.S. gross domestic product (GDP).
The huge size of the U.S. market and U.S. chemical production dictates
that major foreign companies need a U.S. presence. This motivates large
amounts of foreign investment in the U.S. chemical industry and adds to
U.S. production, technology, and the international competitiveness of
U.S.-based research and development (R&D) and production.
Chemicals is a very dynamic industry, with large expenditures for R&D

providing a constant flow of new products and processes. The U.S. chemical
industry is R&D-intensive, employing over 89,000 R&D chemists, engineers,
and technicians in the constant search for innovations. The role of chemistry
in modern life is ubiquitous and growing. Before World War I, only 3 patents
of every 100 issued by the U.S. Patent Office were in the chemicals field. In
the 1980s, chemical patents accounted for about 15 percent of each year’s total.
The chemicals industry is the nation’s top industry R&D spender — an

estimated $18 billion in 1994 (Figure 5). Chemical industry R&D spend-
ing has been growing rapidly, increasing from 3.7 percent of sales in 1983
to 5.0 percent in 1994. Over half of the industry’s R&D spending is by the
pharmaceutical sector of the industry. But the continuing search for new
materials, agricultural chemicals, adhesives, sealants, coatings and
preservatives, and a variety of chemicals to meet environmental and

Figure 3B. Role of Chemicals in Everyday Products
Electronics Rely on Chemicals
Agriculture and Food Production Rely on Chemicals

Figure 4. Total Output and Exports of Major Chemical

Producing Countries, 1993
other needs motivates heavy R&D spending by other sectors of the

industry as well.
Chemical industry R&D has traditionally been funded almost solely by

the industry. Although the U.S. government has funded about one-fourth
of the R&D performed by U.S. manufacturing, less than 2 percent of
chemical industry research is U.S. government sponsored. However, the
U.S. government has made important historical investments in basic
chemical research at universities, which have helped to educate the The U.S. government
chemists and chemical engineers employed by the industry. For example, has made important
in 1992, the U.S. government funded $0.316 billion in basic and applied
chemical research (approximately 4.2 percent of industry’s spending that
historical investments
year). The basic research thus funded, mainly at universities, was equiva- in basic chemical
lent to 14 percent of the basic research funded by industry that year. research at universities.
Federally funded research has been particularly important in the health

care field, where programs such as the Human Genome project have
benefited both the pharmaceutical and biotechnology industries. In 1992,
U.S. government funding for basic biological and medical science re-
search was $0.005 billion compared to $1.2 billion in basic research
funded by industry. During 1992, federal funding for applied research in
this area totaled $4.0 billion in contrast to industry funding of $3.3
billion. While much larger sums are spent by industry in the develop-

Figure 5. U.S. Chemical Industry

Research and Development Spending
ment of new products ($4.25 billion), the U.S. government has made a
The U.S. government seminal contribution to the development of basic knowledge and to
has made a seminal education of scientific and technical personnel in these areas.
contribution to the
Over 1 Million U.S. Jobs
development of basic
The chemical industry directly employs a large number of workers.
knowledge and to
Industry employment has been quite stable and the industry’s employ-
education of scientific ees are well-paid. Employment in 1994 averaged 1.054 million, about 5
and technical personnel. percent below the peak 1981 level. Over the same 1981–94 period, indus-
try output increased by 44.8 percent, indicating productivity gains of
about 3.3 percent annually. The 5 percent decline in total chemical indus-
try employment from 1981 levels was modest compared to the 10.4
percent drop for total manufacturing sector employment. This difference
mirrors the chemical industry’s strong international trade performance
compared to manufacturing as a whole.
About 8.5 percent of chemical industry employees are R&D scientists

and engineers. Another 53 percent are production workers who earn
about one-third more than the manufacturing average and who experi-
ence injury and illness rates about one-half the manufacturing average.

Although total chemical industry employment has been quite stable,

there has been significant restructuring within the industry. In the 1980s,
competition forced the closing of a number of inefficient and obsolete Although total chemical
plants and the modernizing of production processes. Also, many compa- industry employment
nies during the 1980s put more emphasis on specialty chemicals, expect- has been quite stable,
ing them to yield higher profit margins than basic industrial chemicals. there has been significant
restructuring within
The economic downturn of the early 1990s and a continuing increase in the industry.
global competition have brought additional changes. Many companies
have “downsized,” often significantly reducing their nonproduction
workers. The sectoral composition of employment within the industry
has also changed. Of eight industry segments, six have lower employment
than in 1981. But “Soap, Cleaners, and Toilet Goods” employment increased
by 4.4 percent to 152,400, and pharmaceuticals employment increased by
33.0 percent to 264,600. Only 22,100 of the pharmaceuticals employment
increase was in production workers, probably signaling increases in the
number of persons devoted to R&D and to compliance with regulations.
A Global Industry
The chemical industry is perhaps the nation’s most global major manu-
facturing industry. Globalization is manifested in worldwide diversifica-
tion of production, high levels of foreign investment, rapidly rising
levels of foreign trade, and increasingly intense competition for U.S. and
foreign markets. Chemical markets around the world are now suffi-
ciently integrated that world supply-demand relationships determine
world prices for many basic products that can readily be transported
across oceans and over great distances.
Many developing countries are pursuing export-led growth strategies

that rely on industrializing — on building their own manufacturing
industries. Industrializing countries want their own chemical production
capabilities to support their other manufacturing industries, to build
their own technology bases, and to obtain the value added by the pro-
duction process. At the same time, well-established producers in many
countries are motivated to invest in foreign markets — particularly in
developing countries — as a means to continued growth and interna-
tional competitiveness. Large U.S. companies have investments in pro-
duction facilities around the world, and foreign companies have similar
investments in the U.S. and other countries.
The end-1994 book value of U.S. direct investments in foreign chemical

companies was $51.6 billion. The comparable value of foreign compa-

nies’ investments in the U.S. chemical industry was $67.3 billion. But
these data do not fully convey the globalization of business activity. U.S.
chemical companies in 1992 controlled assets of $194 billion in foreign
countries; foreign companies controlled assets of $162 billion in the
United States (Figure 6). U.S.-owned companies in foreign countries
employed 740,000 persons and generated $186 billion of sales; foreign
companies employed 515,000 persons in the United States and generated
sales of $123 billion. Some U.S. companies derive half or more of their
total revenues and profits from foreign operations. For the 171 U.S.
parent chemical companies as a whole, however, $8.6 billion — 35 percent —
of the $24.7 billion of 1992 profits came from their foreign affiliates.
New chemical production sites include some countries that have the
competitive advantage of low-cost energy. Energy costs are important
because hydrocarbons — oil, natural gas, coal — are used both for raw
materials (termed “feedstocks” by the industry) and to power the pro-
duction process. Countries that do not have access to low-cost energy
often provide aid to their new producers by various forms of govern-
ment assistance and subsidies.
As a result of globalization, the number of chemicals whose prices are set

by global supply-demand relationships is likely to increase steadily.
Capital Intensive
There are about 12,085 chemical production establishments in the United
States. Total chemical company assets at the end of 1994 were about $442
billion, 14.6 percent of the manufacturing total. Shareholder’s equity was
about $160 billion.
A continuing flow of new
investment in plant and Chemicals is a capital-intensive industry, with large economies of scale in
equipment and R&D is production. This is particularly true for the producers of basic industrial
necessary to increase chemicals. For the chemical industry as a whole, companies with assets
under $25 million account for less than 3 percent of total industry assets.
U.S. production, to meet
Invested capital is around $148,200 per employee, about twice the manu-
changing environmental facturing average.
standards, and to
improve productivity Large accumulated stocks of physical capital and the advanced technolo-
in the never-ending gies created by earlier research are critical factors in the U.S. industry’s
struggle to maintain international competitiveness and its ability to pay high wages. But a
U.S. competitiveness. continuing flow of new investment in plant and equipment and R&D is
necessary to increase U.S. production, to meet changing environmental
standards, and to improve productivity in the never-ending struggle to

Figure 6. Globalization of the Chemical Industry
maintain U.S. competitiveness. New plant and equipment investment

reached $23.4 billion in 1994, double the 1983 total (Figure 7).
Environmentally Committed
The chemical industry is one of the nation’s most regulated industries.
It is subject to numerous environmental regulations as well as the volun-
tary obligations imposed by the industry’s Responsible Care ® program
— its environmental, health, and safety improvement initiative. Sixteen
major federal statutes, as well as numerous state laws, impose significant
compliance and reporting requirements on the industry (see Box 2). The
costs of meeting mandated and self-imposed environmental requirements
are large and continue to grow. Indeed, about one-sixth of new P&E
investment is for environmental improvement purposes rather than to
improve productivity or increase output.
According to U.S. government data the chemical industry spent $5.4

billion in 1993 operating costs to meet government requirements for
pollution abatement and control, up from $2.8 billion in the six years
from 1987. The bulk of these costs — $4.1 billion in 1993 — was borne by
the manufacturers of industrial chemicals who convert raw materials
such as oil, coal, and natural gas to basic chemicals for industrial uses.
These pollution control costs have been rising faster than sales. U.S.
government-measured pollution abatement and control costs for industrial

Figure 7. U.S. Chemical Industry

Plant and Equipment Spending
chemical producers rose from 1.9 cents per dollar of sales in 1983 to 3.3
cents in 1993.
The 1995 chemical These data, however, reflect only a fraction of total industry environmen-
industry labor costs of tal costs. The data cited above essentially capture only operating costs
preparation of toxic (including depreciation) of equipment intended to reduce the generation
of air pollutants, water pollutants, or solid/contained wastes. Not included
release inventory (TRI)
are the costs of cleanup of areas designated as hazardous waste sites under
reporting will be about the Superfund law and the large personnel costs involved in environ-
$132 million. mental compliance and reporting. For example, using EPA estimates of
the number of reports, labor hours, and labor costs, the 1995 chemical
industry labor costs of preparation of toxic release inventory (TRI)
reporting — just one of many required reports — will be about $132
million.
Also not included in pollution abatement and control costs as measured

by government data are the substantial costs of the voluntary commit-
ment by the chemical industry’s major producers to continuous improve-
ment in performance in accordance with ten guiding principles and six
performance codes set out in the Responsible Care® initiative (see Box 3).
The Responsible Care® initiative, which originated in Canada, is interna-

Box 2. Major Health, Safety, and Environmental Legislation

Toxic Substances Control Act (TSCA) of 1976 gives the Environmental Pro-
tection Agency (EPA) comprehensive authority to regulate any chemical
substance whose manufacture, processing, distribution in commerce, use,
or disposal may present an unreasonable risk of injury to health or the
environment.
Clean Air Act (CAA) was first passed in 1955 as the Air Pollution Control,
Research and Technical Assistance Act and amended in 1963 to become the
CAA. A more significant statute was passed in 1970 and amended in 1977
and 1990. It provides EPA authority to regulate air pollutants from a wide
variety of sources including automobiles, electric power plants, chemical
plants, and other industrial sources.
Clean Water Act (CWA) was first enacted in 1948 as the Federal Water Pol-
lution Control Act. Subsequent extensive amendments defined the statute
to be known as the CWA in 1972; it was further amended in 1977 and 1987.
The CWA provides EPA authority to regulate effluents from sewage treat-
ment works, chemical plants, and other industry sources into U.S. water-
ways. EPA has recently undertaken control efforts in non-point source
pollution as well.
Comprehensive Environmental Response Compensation and Liability Act
of 1980 (CERCLA) and the Superfund Amendments and Reauthorization
Act of 1986 (SARA) provide the basic legal framework for the Federal
“Superfund” program to clean up abandoned hazardous waste sites.
Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) provides EPA
authority to register and assess the risks of agricultural pesticides, indus-
trial biocides, and other nonagricultural pesticides. It was first enacted in
1947 and last amended in 1988.
Federal Food, Drug and Cosmetics Act (FDCA) provides the Food and Drug
Administration (FDA) authority to regulate the manufacturing of drugs and
pharmaceuticals and the use of packaging and additives in food and cosmetics.
Emergency Planning and Community Right-to-Know Act of 1986, also
known as SARA Title III, mandates state and community development of
emergency preparedness plans and also establishes an annual manufactur-
ing-sector emissions reporting program.
Resource Conservation and Recovery Act (RCRA) of 1976 provides EPA
with authority to establish standards and regulations for handling and
disposing of solid and hazardous wastes.
Occupational Safety and Health Act (OSHA) provides the Department of
Labor authority to set comprehensive workplace safety and health stan-
dards, including permissible exposures to chemicals in the workplace, and
authority to conduct inspections and issue citations for violations of safety
and health regulations.
Safe Drinking Water Act, enacted in 1974 and amended in 1977 and again
in 1986, establishes standards for public drinking water supplies.

Box 2. Continued
Hazardous Materials Transportation Act (HMTA) provides the Department
of Transportation the authority to regulate the packaging and movement of
hazardous materials.
Chemical Diversion and Trafficking Act (CDTA) of 1988 is designed to
prevent the diversion of chemicals to illegal drug producers.
Pollution Prevention Act of 1990 makes it the national policy of the United
States to reduce or eliminate the generation of waste at the source when-
ever feasible and directs the EPA to undertake a multimedia program of
information collection, technology transfer, and financial assistance to the
states to implement this policy and to promote the use of source reduction
techniques.
Flammable Fabrics Act, enacted in 1970 and last amended in 1983, gives
the Consumer Product Safety Commission the authority to set flammability
standards for fabrics that protect against an unreasonable risk of the occur-
rence of a fire.
Poison Packaging Prevention Act of 1953, and last amended in 1990, pro-
vides the Consumer Product Safety Commission authority to set standards
for the special packaging of any household product to protect children
from a hazard.
Consumer Product Safety Act, enabled in 1972 created the Consumer Prod-
uct Safety Commission, and gives the Commission authority to issue man-
datory safety standards, ban hazardous products, investigate safety of
products, and use other forms of corrective action.
State Regulations. State governments are increasingly active in the environ-
mental and safety areas.
tional in scope. It is now being implemented in 38 countries and is

growing rapidly. It commands attention and resources from every part of
the chemical production process, requiring substantial investment by
those companies that have embraced its requirements.
Commitment to the U.S. Chemical Manufacturers Association Respon-

sible Care® program is a condition of membership in the Association,
whose 186 member companies provide 90 percent of the U.S. production
of industrial chemicals. Partner memberships include some 23 additional
companies and 19 associations.
The extensive, goal-oriented health, safety, and environmental perfor-

mance improvement efforts of the Responsible Care® initiative have
proven to be an effective, efficient way to achieve advances. Responsible
Care® participants believe a key to the strength of this approach is that it

Box 3. Responsible Care® Initiative

In 1988, the Chemical Manufacturers Association (CMA) launched Respon-
sible Care® to respond to public concerns about the safe management of
chemicals. Through Responsible Care ®, more than 200 member and Partner
companies are committed to continuously improving their health, safety,
and environmental performance in a manner that is responsive to public
concerns.
Responsible Care® covers the entire life cycle of the chemical process, from
initial research through recycling and disposal. CMA’s members account
for 90% of the productive capacity for basic chemicals in the United States,
so the initiative has an impact on chemical operations around the country.
And through the Responsible Care® Partnership Program, members from
all levels of the chain of commerce are committed to continuously improv-
ing their health, safety, and environmental performance.
The key to Responsible Care® is industry’s commitment to continuously
improve health, safety, and environmental performance by fully imple-
menting the six Responsible Care® Codes of Management Practices. The six
Codes promote continuous improvement by focusing on management
practices in all areas of chemical operations. CMA member and Partner
companies must make good faith efforts to attain the goals of the six
Codes: Community Awareness and Emergency Response (CAER), Pollu-
tion Prevention, Process Safety, Distribution, Employee Health and Safety,
and Product Stewardship.
Like continuous improvement, openness and dialogue with the public are
vital to the success of the initiative. Through the National Public Advisory
Panel, the public is directly involved in helping to shape the Responsible
Care® initiative. The National Public Advisory Panel acts as a sounding
board for public concerns and is made up of a cross section of environmen-
tal, health, and safety thought leaders. Members and Partners also respond
to public concerns more directly by engaging in a dialogue with their local
communities through Community Advisory Panels around the country.
These local panels, established in the communities near chemical sites,
provide a valuable means of establishing a dialogue with the public.
The Guiding Principles of Responsible Care® outline the philosophy of the
initiative. Member and Partner companies pledge to manage their busi-
nesses according to these principles:
■ To recognize and respond to community concerns about chemicals
and our operations.
■ To develop and produce chemicals that can be manufactured, trans-
ported, used, and disposed of safely.
■ To make health, safety, and environmental considerations a priority in
our planning for all existing and new products and processes.
■ To report promptly to officials, employees, customers, and the public,
information on chemical-related health or environmental hazards and
to recommend protective measures.

Box 3. Continued
■ To counsel customers on the safe use, transportation, and disposal of
chemical products.
■ To operate our plant and facilities in a manner that protects the envi-
ronment and the health and safety of our employees and the public.
■ To extend knowledge by conducting or supporting research on the
health, safety, and environmental effects of our products, processes,
and waste materials.
■ To work with others to resolve problems created by past handling and
disposal of hazardous substances.
■ To participate with government and others in creating responsible
laws, regulations, and standards to safeguard the community, work-
place, and environment.
■ To promote the principles and practices of Responsible Care® by shar-
ing experiences and offering assistance to others who produce,
handle, use, transport, or dispose of chemicals.
allows flexibility in how improvements are achieved and that the pro-
gram offers a viable, more efficient alternative to the “command and
control” regulations that governments have traditionally relied upon.
Position in World Markets and Trade Performance
Trade Performance and Competition

International trade is rapidly growing in importance to the U.S. chemical
industry, and the industry’s trade performance is becoming a more
important indicator of its competitiveness. Trade data show that the
Chemical industry chemical industry is the nation’s biggest exporter and one of the most
exports have consistently internationally competitive. Indeed, chemical industry exports have
consistently provided more than $1 out of every $10 of U.S. goods ex-
provided more than $1
ports in recent years. Exports of chemicals and related products reached
out of every $10 of U.S. $51.5 billion in 1994, substantially topping second-ranking total U.S.
goods exports in recent agricultural exports of $46 billion. Exports in 1995 will approach — and
years. possibly top — $60 billion. Chemicals trade has also consistently pro-
vided substantial U.S. surpluses, $18.4 billion in 1994 and a cumulative
total of $140 billion over the 10-year period 1985–94 (Figure 8).
Trade’s growing importance to the chemical industry is evident from the

fact that exports rose from 10.5 percent of total industry shipments in
1983 to 15.1 percent in 1994 (Figure 9).

U.S. chemical imports have also risen relative to U.S. production — from
5.7 percent of industry shipments in 1983 to 9.9 percent in 1994. Al-
though the U.S. industry is increasingly dependent on trade, it is much Although the U.S.
less so than the chemical industries of several other major producer industry is increasingly
nations. Including its shipments to other European Union countries, dependent on trade, it
Germany in 1993 exported 58 percent of its total chemical output, the is much less so than the
United Kingdom, 53 percent, and France, 43.2 percent. On the other hand,
chemical industries of
Japan’s chemical industry — the world’s second largest — exported less
than 10 percent of its output. several other major
producer nations.
The large role of chemicals in U.S. trade and the increasing importance of
trade to the U.S. chemical industry parallels the role and growth of
chemicals in world trade. World trade in chemicals and allied products
was $312 billion in 1992, about 9.1 percent of total world goods trade and
12.9 percent of total world manufactures trade. World chemical trade has
grown much more rapidly than world chemical production, increasing
by 153 percent over the 1981 to 1992 period, compared to a growth of
only 66 percent in world chemical production.
The U.S. plays a large role in world chemical trade, but not so large as
Germany. In 1992 — the latest data available — the United States had a
14.0 percent share of world chemical exports. Germany had a larger
share — 17.2 percent (Figure 10). However, over half — about 53 percent —
of Germany’s total chemical exports went to other European Union coun-
tries.
The 14.0 percent U.S. share of 1992 world chemical exports is down In a world where many
substantially from the 18.6 percent share of 1981 (Figure 11). In a world developing countries are
where many developing countries are becoming producers, a declining
becoming producers, a
U.S. share of world output and trade is probably inevitable. But although
the U.S. share of world chemical exports declined over the 1981–92
declining U.S. share of
period, its share of world imports rose from 7.7 percent to 8.9 percent. As world output and trade
a result, the margin of U.S. export shares over import shares narrowed is probably inevitable.
from 10.9 percentage points in 1981 to 5.1 percent in 1992, indicating a
relative decline in the competitive position of U.S.-based chemical pro-
duction in international markets.
Germany’s export and import shares have remained relatively more stable.
Its share of world exports was 17.8 percent in 1981 and 17.2 percent in
1992. Its share of world imports increased by only one percentage point,
from 9.7 percent in 1981 to 10.7 percent in 1992. Moreover, more often
than not, since the beginning of the 1980s German trade surpluses have
topped those of the United States. But market shares and trade balances

Figure 8. U.S. Chemical Trade, 1981–1994
are not complete measures of the domestic industry’s strength and its
longer term international competitiveness. Other critically important
The international factors include the profitability of domestic operations, the amounts and
competitiveness position profitability of foreign investments, rates of return, and amounts and
of U.S.-based R&D and trends of new investment in plant and equipment and R&D.
chemical production
By most standards the international competitiveness position of U.S.-
today is probably based R&D and chemical production today is probably stronger than
stronger than that of that of the other major chemical producer nations — the several major
the other major chemical European producer countries, Japan, and Canada. But these countries are
producer nations. not the only competitors for world markets, and indeed, they may not be
the fiercest competitors in the years ahead. Like the United States, the
major European producer countries and Japan and Canada have become
mature markets for chemicals. Growth in domestic demand for chemicals
in these mature markets will probably increase at only about the same
pace as their GDP growth, which is likely to be modest compared to the
growth rates of several developing countries. Increasingly, faster-growth
As part of their efforts to developing countries and regions are likely to provide the largest future
opportunities for sales gains.
industrialize, developing
nations will strive to These new markets will offer expanding opportunities for exports of
build their own chemicals and direct investments by established producers. But as part of
production capabilities. their efforts to industrialize, developing nations will strive to build their
own production capabilities. Some of this new production will be used to

Figure 9. U.S. Chemical Trade Shares of Total Shipments
Figure 10. World Chemical Export Shares, 1992
reduce their import needs. But some of it will be exported, increasing the
level of competition in global markets. To cite one example, from 1981 to
1992, the Asian newly industrializing countries (NICs) (Taiwan, Hong
Kong, Singapore, and South Korea) share of world imports increased

from 4.3 to 7.9 percent. But over the same period their share of world
exports rose from 0.6 percent to 2.8 percent. Continuing new investment
in these countries indicates their production capacity and their share of
world export markets will continue to grow, and they may soon become
net exporters in many chemical products, if not net exporters in their
total chemical trade.
Trade Composition by Product

U.S. implementation of the Harmonized System of trade data provides
the finest level of detail available for trade information. Applying the
nomenclature of this system, the United States in 1994 exported 1,054
different chemical and related product items and imported 1,700 chemi-
cal items. In fact, however, a relatively few items account for the major
portion of U.S. chemicals trade. For example, the top 100 chemical ex-
ports alone accounted for 58.3 percent of total exports; the top 100 im-
ports accounted for 49.4 percent of the import total.
U.S. chemical trade continues to include substantial portions of basic

industrial chemicals such as styrene, vinyl chloride, and disodium
carbonate. Overall, the composition of the trade among major product
categories has been relatively stable but is, nevertheless, undergoing
some changes. Exports of organic chemicals, for example, were 24.7
percent of total 1994 exports, down only modestly from a 26.7 percent share
in 1983 (Figure 12). Mirroring a change in world trade composition, how-
ever, inorganic chemicals declined from 14.9 percent of the 1983 total to 7.9
percent in 1994.
Plastics are also a large component in the U.S. trade. Together, primary
and non-primary plastics make up 24.3 percent of 1994 U.S. exports, up
from the 20.0 percent share of 1983.
The pharmaceuticals segment of the industry is somewhat less export-

oriented than the rest of the chemical industry. Pharmaceuticals exports
were only about 11.8 percent of that segment’s sales in 1994 compared to
The United States 15.1 percent for the industry as a whole. Pharmaceuticals are thus a
typically achieves relatively modest portion of U.S. chemical trade, 11.1 percent of U.S.
trade surpluses in each exports in 1983, 11.8 percent in 1994. The pharmaceuticals share of U.S.
of the nine categories chemical imports, however, increased from 7.4 percent in 1983 to 14.7
percent in 1994.
identified by Standard
International Trade Trade in oils and perfumes has been fast-growing but remains a modest
Classification codes. portion of the whole — 6.9 percent of exports and 5.5 percent of imports.

Figure 11. U.S. Share of World Chemical Exports and Imports
Figure 12. Product Composition of U.S. Chemical Industry

The United States typically achieves trade surpluses in each of the nine
categories identified by Standard International Trade Classification
(SITC) codes. In 1994, however, a small inorganic chemicals deficit was
the first in that category in many years. In contrast, however, the rela-
tively modest dyeing and coloring material trade has moved in the last
10 years from consistent small deficits to small but increasing surpluses,
$574 million in 1994.
Geographic Composition of Trade

The geographic distribution of U.S. chemical trade has also been rela-
tively stable, though changes mirroring those in world trade patterns
and changes relating to trade agreements have been occurring. The major
portion of U.S. chemical trade continues to be with other developed
countries — Western Europe, Canada, Japan, and Australia. In 1994, for
example, 58.8 percent of U.S. exports went to developed countries, down
only modestly from 60.7 percent in 1983. Disaggregation of the data,
however, shows an increasing importance of first-ranking Canada —
from 12.9 percent of U.S. exports in 1983 to 17.2 percent in 1994 — and a
decline in the importance of second-ranking Japan, from 13.0 percent to
9.5 percent. The Asian NICs and Mexico were important contributors to
the increase of the developing countries’ share of U.S. exports, which
moved from 35.6 percent in 1983 to 37.9 percent in 1994 (Figure 13).
U.S. imports (Figure 13) are even more dominated by the developed
countries, although their share of imports declined from 83.4 percent in
1983 to 79.8 percent in 1994. Western Europe supplied 25.3 percent of
1994 U.S. imports, Canada 20.1 percent, and Japan 12.6 percent. Among
developing countries, the Asian NICs increased their share of U.S. im-
ports, as did a small group of countries — China and countries of the
Although the major former Soviet Union — not included in the “developing country”
classification.
portion of U.S. chemical
trade is with developed Although the major portion of U.S. chemical trade is with developed
countries, U.S. trade countries — 59 percent of 1994 U.S. exports, 80 percent of imports — U.S.
surpluses come trade surpluses come increasingly from trade with the developing coun-
increasingly from trade tries. In 1994 the U.S. surplus on trade with the developed countries was
with the developing only $3.6 billion, while the surplus on the much smaller trade with
countries. developing countries was $14.2 billion.
Foreign Investment Performance

Foreign investments play a critical and positive role in the competitive-
ness and viability of the U.S. chemical industry, both through the returns
from foreign production and sales and through expanded U.S. exports.

Figure 13. Geographic Composition of U.S. Chemical Trade
As competition for markets becomes tougher, R&D to produce new Foreign investments
products and processes becomes a more important competitive factor. play a critical and
But to be affordable, fast-growing R&D costs must be amortized over
positive role in the
enlarging sales that often can be realized only by selling beyond the
United States and into global markets. Exporting is one way to tap global
competitiveness and
markets. But production and transportation costs, the need for prompt viability of the U.S.
delivery, foreign needs for tailor-made products, the service requirements chemical industry.
that many chemicals pose, and myriad other factors often make it impos-
sible to compete successfully in significant foreign markets solely by
exporting from the United States. Often, to be competitive in an impor-
tant foreign market, companies must produce in that market. But once
U.S. chemical companies invest in foreign affiliate production facilities,
those foreign affiliate companies provide natural channels for exports
from the United States.
Direct investments in the United States by foreign companies and direct

investments abroad by U.S. chemical companies have generated a sub-
stantial trade between U.S. parent companies and their foreign affiliates
and between U.S. affiliates and their foreign parents. U.S. government
data show that in 1992, U.S. chemical companies with foreign investments
exported $31.5 billion of merchandise; $21.5 billion of that — 68 percent

Figure 14. 1992 Exports of Multinational

Chemical Companies in the U.S.
of the total — went to their foreign affiliates (Figure 14). Also, of $12.5
billion of 1992 exports by U.S. affiliates of foreign chemical company par-
ents, $7.0 billion — 56 percent of the total — went to foreign parents and
Both U.S. parent affiliates.
chemical companies
The effects of foreign investment on U.S. imports are even more dra-
and the U.S. affiliates
matic. U.S. parent chemical companies imported $15.2 billion of goods in
of foreign companies 1992 (Figure 15). Of that, $10.1 billion — 66 percent — came from their
generate U.S. trade foreign affiliates. The U.S. affiliates of foreign companies imported $11.8
surpluses on their billion, $9.4 billion of that from foreign parents and affiliates. Neverthe-
foreign trade. less, both U.S. parent chemical companies and the U.S. affiliates of
foreign companies generate U.S. trade surpluses on their foreign trade.
Chemical industry contributions to U.S. trade accounts and the role of

foreign investments in the industry’s performance are not limited to
goods exports and surpluses. The profits of foreign affiliates, service
charges levied by U.S. parents on their foreign affiliates, and the licens-
ing of U.S. technology (mostly to foreign affiliates) are classified as
“services exports” in U.S. international accounts. These exports total
about $9 billion annually. Imports of similar services from foreign coun-
tries (mostly by the U.S. affiliates of foreign companies) typically total

Figure 15. 1992 Imports of Multinational

Chemical Companies in the U.S.
Figure 16. Net Income from Chemical

Industry Direct Investment

about $6 to $7 billion, leaving the United States with an annual chemical

industry “services” trade balance of some $2 to $4 billion (Figure 16).
Foreign investments are Foreign direct investments thus not only add to parent company sales
a very important factor and profits, but in addition, foreign plants typically become markets for
inputs from U.S.-based production and channels for sales of products not
in the U.S. chemical
made in the foreign plant. Clearly, foreign investments are a very impor-
industry’s strong tant factor in the U.S. chemical industry’s strong international competi-
international competitive tive position. The U.S. chemical industry gained advantage by investing
position. abroad early. The large growth in foreign investment in the U.S. chemical
industry has been more recent (Figure 17). As a result, although the 1994
book value of foreign investment in the U.S. ($67.3 billion) now exceeds
the book value of U.S. chemical investments abroad ($51.6 billion), the
real worth and the earning power of the U.S. investments abroad still
exceeds that of foreign investment in the United States. But the more
important question, discussed later in this paper, is whether the recent
pace of the U.S. industry’s investment abroad and the investments in the
years ahead will be adequate to maintain the longer term competitive-
ness of U.S.-based R&D and production.
Economic Performance and Financial Position
The U.S. chemical industry consists of some 9,125 corporations whose

primary business is the development, manufacturing, and marketing of
chemicals. U.S. government financial data disaggregates the industry
into three segments: industrial chemicals, pharmaceuticals, and other
chemical products. The industrial chemicals and other chemical products
segments of the industry are often similar in economic and financial
performance, but the pharmaceuticals (drugs) industry often differs in
profits, rates of return, and other important measures (Table 1).
Revenues and Assets

Chemical industry revenues have grown rapidly, rising from $201 billion
in 1983 to almost $357 billion in 1994, a 77 percent increase (Table 1). A
rising portion of this revenue stream, however, appears to be going to
pharmaceuticals companies. The pharmaceuticals share rose from 14.4
percent in 1983 to 25.2 percent in 1994.
Total industry assets over the same period increased from $187.6 billion
to almost $464 billion (Table 1), with the pharmaceuticals share growing
from 17.6 percent in 1983 to 29.5 percent in 1994.

Figure 17. Continuing Globalization

through Direct Investment
Net fixed capital (total fixed capital less accumulated depreciation and
amortization) increased from $78.3 billion in 1983 to $156.2 billion in
1994. As of 1994, 55.1 percent of net fixed capital was in industrial chemi-
cals, 20.0 percent in pharmaceuticals, and 24.9 percent in other chemical
products.
According to the U.S. Commerce Department’s Bureau of Economic

Analysis, the average age of the industry’s net capital stock in 1994 was
5.34 years, down modestly from the 1987 high of 5.87 years but well
above the 1977 low of 4.55 years.
The debt-to-equity ratios of the chemical industry doubled from 1983 to

1994, rising from 0.93 to 1.85 (Table 1). Over the same period the ratio for
manufacturing as a whole rose from 1.04 to 1.67. The ratio for the indus-
trial chemicals sector (2.12) is significantly higher than those of pharma-
ceuticals (1.63) and other chemical products (1.73).
Investment Trends
Investments in R&D and new plant and equipment are critical to the
industry’s competitiveness. Industry R&D funding rose from $6.8 billion
in 1983 to an estimated $18 billion in 1994, a 165 percent increase. The
pharmaceuticals sector accounts for a rising portion of the total, 57.4
percent in 1994.

Table 1. Chemical Industry Revenue and Assets
Revenues (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Total 201,319 209,627 202,804 205,778 225,200 261,616 278,300 287,457 297,841 315,534 325,074 356,876
Industrial 94,698 98,078 79,292 81,400 96,548 115,394 111,391 112,088 113,310 122,545 122,667 140,480
Pharmaceuticals 29,088 30,900 35,124 37,768 42,903 46,205 51,251 58,993 67,147 73,645 82,012 90,106
Other 77,533 80,649 88,388 86,610 86,749 100,017 115,658 116,376 117,384 119,344 120,394 126,291
Total Assets (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Total 187,572 193,089 205,339 217,166 244,446 277,582 293,317 325,370 357,665 385,374 418,285 463,973
Industrial 92,162 93,612 88,854 90,986 109,927 122,966 120,760 136,015 161,484 176,333 184,345 197,090
Other 62,464 63,970 76,190 79,560 81,311 98,724 110,353 116,132 115,963 117,094 121,891 129,846
Net Fixed Capital (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Total 78,227 77,281 77,166 77,547 82,766 92,835 100,219 114,586 129,785 141,857 147,292 156,150
Industrial 44,251 43,905 39,004 38,777 43,402 47,729 46,606 56,396 68,607 78,109 80,512 86,071
Other 24,387 22,666 26,072 25,926 25,099 29,334 35,943 37,881 37,390 37,182 37,493 38,864
Debt to Equity Ratio

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Total 0.93 0.92 1.05 1.15 1.29 1.30 1.30 1.35 1.39 1.58 1.74 1.85
Industrial 1.04 1.01 1.18 1.19 1.42 1.38 1.21 1.35 1.51 2.03 2.04 2.12
Pharmaceuticals 0.70 0.72 0.77 1.04 1.24 1.18 1.03 1.02 0.99 1.07 1.30 1.63
Other 0.92 0.93 1.07 1.19 1.15 1.28 1.60 1.63 1.58 1.51 1.81 1.73
Chemical industry R&D spending is higher relative to sales than in most

industries, reaching 5.3 percent in 1993 before declining modestly rela-
tive to 1994’s very strong sales gains. R&D has grown relative to sales in
all three segments but is highest in the pharmaceuticals segment, averag-
ing 10.4 percent over the 1983–94 period (Figure 18).
Capital equipment expenditures have also been increasing rapidly,

reaching an estimated $25.6 billion in 1994. Capital spending, however,
continues to be dominated by industrial chemicals, with 1994 expendi-
tures of $13.9 billion, 54 percent of the total.
Capital spending is also a higher portion of total revenues for industrial

chemicals than for the other two segments. For the 1983–94 period,
industrial chemicals capital expenditures averaged 9.1 percent of rev-

Figure 18. R&D Percent of Sales
enues compared to 6.2 percent for pharmaceuticals and 3.1 percent for
other chemical products (Table 2). Pharmaceuticals profit
Profits
performance has been
consistently strong in
As is often the case with capital-intensive manufacturing industries,
chemical industry profits fluctuate markedly with the business cycle, recent years, much less
rising when demand, capacity utilization, and prices increase, declining affected by business
rather sharply when demand, prices, and capacity utilization fall. These cycles and global
tendencies apply primarily to industrial and other chemical products, competition.
however. Pharmaceuticals profit performance has been consistently
strong in recent years, much less affected by business cycles and global
competition (Table 3). Rather, consistent growth in the demand for
pharmaceutical products is closely correlated with increasing health
care expenditures that accompany rising incomes and living
standards.
Chemical industry profits hit a new high of $30.4 billion in 1994, 17.3
percent of the manufacturing sector total, a portion close to the 17.0
percent 1983–94 average. Pharmaceuticals profits were $13.2 billion, a
new record and 43.5 percent of the industry total — well above the 39.9
percent average contribution for 1983–94. Industrial chemicals profits
were $8.4 billion in 1994, the best performance since 1989 but well below
the $10.2 billion record high of 1988. Industrial chemicals profits were
27.8 percent of the 1994 industry total, somewhat below the 30.7 average
for the 1983–94 period. The other chemical products segment also set a

Table 2. Capital Equipment Investment Trends
Capital Equipment (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Total 9,154 9,825 10,852 10,179 11,890 14,558 18,849 19,350 24,188 24,585 23,902 25,633
Industrial 5,635 5,552 6,221 5,861 6,956 8,860 11,828 12,960 15,373 13,748 13,057 13,860
Other 1,980 2,431 2,685 2,604 2,547 2,939 3,676 3,488 4,782 4,995 4,868 5,335
Capital Equipment as a Percent of Sales

Average
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–94
Total 11.7 4.7 5.4 4.9 5.3 5.6 6.8 6.7 8.1 7.8 7.4 7.2 6.8
Industrial 6.0 5.7 7.8 7.2 7.3 7.7 10.6 11.6 13.6 11.2 10.6 9.9 9.1
Pharmaceuticals 5.3 6.0 5.5 4.5 5.6 8.1 6.5 4.9 6.0 7.9 7.3 7.1 6.2
Other 1.4 1.7 3.0 3.0 2.9 2.9 3.2 3.0 4.1 4.2 4.0 4.2 3.1
Table 3. After-Tax Profits
Income After Taxes (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Total 11,643 13,883 9,541 12,901 16,559 23,661 24,523 23,418 19,997 12,996 15,550 30,412
Industrial 3,517 5,309 1,741 4,920 7,150 10,243 9,320 7,842 4,744 −2,582 4,218 8,458
Other 4,720 4,462 4,344 2,477 4,999 6,029 7,458 6,240 5,055 6,096 1,133 8,724
Percent of Total
Average
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–1994
Industrial 30.2 38.2 18.2 38.1 43.2 43.3 38.0 33.5 23.7 −19.9 27.1 27.8 28.3
Other 36.7 32.1 45.5 19.2 30.2 26.5 30.4 26.6 25.3 46.9 7.3 28.7 28.9
new profit record, $8.7 billion, 28.8 percent of the 1994 industry total,
compared to the 29.4 percent average for the 1983–94 period.
Rates of Return
There are also significant differences among the three industry segments
in some key indicators of longer term performance. For example, the

Table 4. Rates of Return
Profit of Sales (Percent)

Average
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–1994
Total 5.8 6.6 4.7 6.3 7.4 9.0 8.8 8.1 6.7 4.1 4.8 8.5 6.7
Industrial 3.7 5.4 2.2 6.0 7.5 8.9 8.4 7.0 4.2 −2.1 3.4 6.0 5.1
Other 5.5 5.5 4.9 2.9 5.8 6.0 6.4 5.4 4.3 5.1 0.9 6.9 5.0
Return on Assets (Percent)

Average
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–1994
Total 6.2 7.2 4.6 5.9 6.8 8.5 8.4 7.2 5.6 3.4 3.7 6.6 6.2
Industrial 3.8 5.7 2.0 5.4 6.5 8.3 7.7 5.8 2.9 −1.5 2.3 4.3 4.4
Other 6.8 7.0 5.7 3.1 6.1 6.1 6.8 5.4 4.4 5.2 0.9 6.7 5.4
Return on Equity (Percent)

Average
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–1994
Total 12.0 13.8 9.5 12.8 15.5 19.6 19.2 16.9 13.4 8.7 10.2 18.7 14.2
Industrial 7.8 11.4 4.3 11.8 15.8 19.8 17.0 13.6 7.4 −4.4 7.0 13.4 10.4
Other 13.1 13.5 11.8 6.8 13.2 13.9 17.6 14.1 11.2 13.0 2.6 18.4 12.4
1983–94 average return on revenues for the industry as a whole was 6.7
percent, compared to a 3.9 percent return for manufacturing as a whole.
But within the chemical industry, the return on revenues was 5.1 percent
for industrial chemicals and 5.0 percent for other chemical products, but
13.6 percent for pharmaceuticals. Similarly, the return on assets for 1983– The high rates of
94 was 4.4 percent for industrial chemicals and 5.4 percent for other return enjoyed by
chemical products, but 11.0 percent for pharmaceuticals. The average pharmaceuticals
return on equity for the twelve-year period was 10.4 percent for indus- companies have allowed
trial chemicals, 12.4 percent for other chemical products, and 22.5 percent
high levels of new
for pharmaceuticals (Table 4).
investment, particularly
The high rates of return enjoyed by pharmaceuticals companies have in R&D.
allowed high levels of new investment, particularly in R&D. This invest-
ment has, in turn, increased the pace of new product introductions,
increased sales, and helped to make the U.S. pharmaceutical industry a
world leader.

Rates of return have not only been much lower for the other segments of
the industry, but may also be more vulnerable to competition. Arguably,
rates of return for the industrial chemicals group may be falling, perhaps
at least in part because environmental compliance costs in that segment
have been rising relative to sales. Over the longer 14-year period 1981 to
1994, the pharmaceutical group’s return on equity (ROE) fluctuated
between 15.2 percent and 28.8 percent, and the 1994 ROE of 25.4 percent
was not far below the 1988 high of 28.8 percent. ROE for other chemical
products companies over the same 14-year period ranged from 2.6
percent to a 1994 record of 18.4 percent.
The industrial chemicals ROE, however, ranged from the –4.4 percent
low of 1992 to the 1988 high of 19.8 percent. For the cyclical industrial
chemicals segment, 1994 was a very good year — one of the best in
recent history. The U.S. economy was strong and growth rates in much of
the global economy were good. As a result, demand for several basic
chemicals was strong and prices were firm, though not at record levels.
Indeed, 1994 may well represent the peak — or near-peak — of the
current cycle and a match of favorable conditions unlikely to be sus-
tained for long. Yet, industrial chemicals profits did not rise to new
highs, and the 13.4 percent return on equity for 1994 was well below the
A key question is levels of other recent cycle peaks. This may be a signal that if global
whether the long-term competition continues to intensify, it will be difficult to sustain industrial
returns for industrial chemical ROE around the 10.4 percent 1981–94 average, let alone to raise
it.
chemicals and for other
chemical products are Thus, a key question is whether the long-term returns for industrial
sufficiently high to merit chemicals and for other chemical products are sufficiently high to merit
the new investment in the new investment in both U.S.-based and foreign production facilities
both U.S.-based and necessary to motivate and fund their international competitiveness
foreign production needs. Unfortunately, when global investment requirements are consid-
facilities necessary ered, investment capital needs for industrial chemicals and other chemi-
cal products segments of the industry are likely to be much larger than
to motivate and fund
those needed by the less capital-intensive pharmaceuticals companies.
their international Construction of some industrial chemical production facilities may
competitiveness needs. require investments of hundreds of millions of dollars, but new pharma-
ceutical production facilities are typically much less costly. Direct invest-
ments in foreign markets by the pharmaceutical industry will thus typically
require relatively less capital than investments by the more capital-
intensive industrial chemicals and other chemical product companies.

II. FORCES SHAPING THE INDUSTRY

Central to maintaining
M any factors shape the international competitiveness of U.S.-based

chemical production. A well-developed research and production
infrastructure, access to competitively priced energy, and a variety of
competitiveness are
continued high and
growing levels of R&D
other factors discussed below currently allow the United States to be a
to develop new products
low-cost production base for many chemicals. But in a fast-changing
world these strengths are not immutable. Central to maintaining com- and processes, and high
petitiveness are continued high and growing levels of R&D to develop levels of P&E spending
new products and processes, and high levels of P&E spending to imple- to implement the new
ment the new technologies and make the new products. In turn, how- technologies and make
ever, high levels of R&D and growing P&E spending are in the longer the new products.
term dependent on high and growing revenues and profits. The amounts
and locations of investments in R&D and P&E respond to the signals
provided by profits and rates of return. Profits and rates of return inad-
equate to motivate needed investments in R&D and P&E would ulti-
mately jeopardize the longer term competitiveness of U.S.-based produc-
tion.
Profitability of the industry will be shaped by many forces, including the

existing infrastructure and competitive advantages, U.S. access to foreign
markets, the U.S. and world economic climates, and the resulting global
chemical supply-demand relationships. Clearly, however, as the number
of global suppliers increases, competition gets tougher. U.S. government
regulatory and other policies that directly affect the chemical industry’s
U.S. costs of production and its profitability will become much more
important in determining the industry’s international competitiveness
than in earlier years when the U.S. industry and producers in a few other
countries were dominant in world markets.
Infrastructure and Sources of Current Strengths
The strong current international competitive position of the U.S. chemi-

cal industry stems from many factors, including the following:
The U.S. chemicals market is the world’s largest. Although foreign

trade is growing in importance, most of U.S. chemical production —
about 85 percent of the total — still goes to U.S. markets. U.S. chemical
producers thus are still less susceptible to foreign economic fluctuations,
currency exchange rates, and the trade policies of other countries than
are producers in most other countries.

The U.S. is the world’s largest chemical producer country. The world’s
largest chemical market provides economies of scale for production of
large volumes of a wide range of chemical products.
Investment in R&D and P&E is large. Large domestic markets, foreign

markets accessed by direct investments, and a strong international trade
competitive position over several decades have led to sustained high
levels of R&D and P&E spending and development of an efficient U.S.
research and production infrastructure that will be difficult for new
foreign competitors to match.
Energy — a vital input to chemical production — is generally competi-

tively priced in U.S. markets. Energy — for both feedstocks and power
— is vital to chemical production. Chemical industry energy consump-
tion is about 7 percent of the U.S. total.
An excellent port and internal transportation system effectively moves

both energy inputs and industry products. This transportation system
Foreign investments — including pipelines, inland waterways, railroads, and trucking —
provide critical access facilitates efficient production and distribution and the competitiveness
to foreign markets via of U.S.-based production in both domestic and foreign markets.
exports from U.S. parent
companies to their Large, well-established foreign direct investments are a major competi-
foreign affiliates. tive asset. Direct investments abroad provide additional sales against
which rising R&D and other costs can be amortized. The profits from
foreign operations, license fees, and other charges levied on their foreign
affiliates add to the strength of U.S. parent companies. Moreover, foreign
investments also provide critical access to foreign markets via exports
from U.S. parent companies to their foreign affiliates. At the same time,
the large U.S. market attracts significant amounts of foreign investment
and foreign technologies that also help to keep U.S. production competi-
tive.
The dollar exchange rate provides a current but perhaps only tempo-
rary advantage. The dollar at mid-1995 was weak against the German
mark and the Japanese yen. Given the linkages of the mark to other
European currencies and the importance of the yen in Asian markets, the
dollar was thus weak against the currencies of the majority of major
chemical-producing nations. This provides U.S. producers with new
advantages in the markets of major producer countries and in third
country markets as well. In the longer term, however, neither industry
competitive advantage nor increased U.S. living standards can be
achieved by currency depreciation. A stronger dollar is desirable from

the standpoint of members of the economy, and at least some near-term

dollar recovery from mid-1995 levels vis-a-vis the Japanese yen and the
German mark is seen as likely. Chemicals has benefited
enormously from the
The educational and business environment has helped to shape the research done in U.S.
industry’s dynamism. Many intangible factors that will be difficult for
universities and from
other producer countries to replicate have contributed to the growth and
advanced state of the U.S. chemical industry. A science-based industry, the skills imparted to
chemicals has benefited enormously from the research done in U.S. graduates of chemistry
universities and from the skills imparted to graduates of chemistry that that do the R&D in
do the R&D in individual companies. Moreover, the United States is individual companies.
widely considered to have outstanding chemical engineers who can
implement and bring into production the discoveries of laboratory
scientists.
For example, U.S. chemical engineers and U.S. chemical engineering

construction companies, widely judged to be among the best in the
world, have been critical factors in the rapid development and global
leadership of the U.S. petrochemical industry.
In addition, the U.S. business environment in several instances has been

favorable, allowing the U.S. industry to develop its comparative advan-
tages. For example, the United States is generally seen as now providing
more favorable conditions for the growth of biotechnologies than some
European countries. And, in earlier decades, the rapid growth of the auto
and chemical industries was mutually reinforcing. The auto industry’s
rapid growth stimulated the demand for many basic chemicals and
many new chemical products, and in turn, new chemical products
promoted the advance of auto technology and stimulated increasing
demand for autos. The interaction between the two industries continues
today. Also important, the United States remains a dynamic society,
generally open to new discoveries and products, an attitude that facili-
tates the growth and progress of science-based industries.
The factors noted above and other strengths typically make U.S. chemi-
cal companies both innovative and relatively low-cost producers of
many products in today’s world economy. But a growing number of new
producers, such as Saudi Arabia and some other producers in energy-
rich countries, may now have lower costs than U.S. producers. And, in a
fast-changing world, existing U.S. competitive advantages could erode
over time, perhaps more rapidly than they accrued.

Global Supply-Demand Relationships
Countries that are industrializing aspire to have their own chemical

industries. The role that chemicals play in enabling other manufacturing
(and the value added by this role) makes the development of a chemical
industry a critical step in the industrialization process. These characteris-
tics have made the chemical industry highly globally dispersed; this
dispersal can be expected to increase as more countries develop indig-
enous chemical production capabilities.
As has been noted above, the pharmaceutical portion of the chemical

industry is more R&D-intensive and less capital-intensive than the other
two segments. Moreover, pharmaceutical sales and profits are less sus-
ceptible to business cycles, tending to expand with the growth of living
standards and health care in individual countries. And product differen-
tiation and patent protection provide some insulation from business
cycles and supply-demand mismatches. But the profits of the more
capital-intensive industrial chemicals and other chemical products
In a global market companies are sensitive to changes in prices and volumes. Their profit-
the supply-demand ability has long been strongly affected by supply-demand imbalances
resulting from mismatches in investment patterns and business cycles.
imbalances in some basic
industrial chemicals need Industrial chemical companies have long lived with a boom-bust cycle,
only be relatively small but in earlier years the domestic economy’s business cycle was more
to have significant effects dominant in determining their profitability than it is today. In earlier
on global prices and years prices were set primarily by the balance between U.S. supplies and
hence, on profits. U.S. demands. But in today’s global economy, global supply-demand
balances set prices for many chemicals. Moreover, in a global market the
supply-demand imbalances in some basic industrial chemicals need only
be relatively small to have significant effects on global prices and hence,
on profits. Thus, a relatively modest global supply shortfall can produce
sharp price and profit increases. But a similarly modest oversupply can
significantly depress prices and profits in a global marketplace.
Thus, in an era where industry prices — and profits — are more and
more set by global forces, the relationship between the global supply of
chemicals and global demand will be an increasingly important determi-
nant of the long-term profitability and competitiveness of U.S.-based
R&D and production of industrial chemicals and other chemical prod-
ucts. This globalization of supply-demand relationships significantly
complicates company investment, marketing, and competitiveness
strategies — strategies that now must consider both global and national
supply-demand trends.

Forecasting national supply-demand relationships is itself difficult and

uncertain. But projecting global supply-demand relationships is fraught
with so many uncertainties that the forecasts must be seen as highly
uncertain at best. Forecasts of the supply side of the equation are tenuous.
Plants announced as scheduled to be built may not be built, or construc-
tion schedules may be stretched out. On the other hand, continuous
improvements and debottlenecking not reflected in supply projections
can significantly raise the capacity of existing plants. And plants said to
be scheduled for shutdown may instead continue to operate. As the
number of suppliers increases, difficulties in forecasting and adapting to
supply growth will increase.
Projections of global demand levels are also highly uncertain. The de-
mand for chemicals fluctuates with and is amplified by the business
cycle. Business cycles and resulting chemical needs of developed coun-
tries with established historical relationships of chemical demand to
GDP growth ratios are difficult enough to forecast. But the chemical
needs of rapidly industrializing countries highly dependent on exports
for their economic growth are even more difficult to forecast. Moreover,
in a number of developing countries where the growth in demand for
chemicals will be high relative to economic growth rates, market assess-
ments will be complicated by political volatility and/or the economic
problems and difficulties inherent in the transition to a market-based
economy.
Such volatility in developing countries may result in rather wide fluctua-

tions in their economic growth rates and, hence, even wider fluctuations
in their consumption of chemicals. As developing countries represent an
increasing share of world output and consumption, global demand may
thus not only become even more difficult to forecast but may also be
subject to wider fluctuations.
Whether an increasingly integrated and more industrialized world

economy will tend to aggravate or mitigate the effects of business cycles
on a capital-intensive chemical industry with global production remains
to be seen. In an environment of “rolling” business cycles — where
different economies tend to be in different phases of the business cycle —
fluctuations in the demand for chemicals would be smoothed by the
offsetting effects of expansion in some economies concurrent with slow
growth or contractions in others. But to the extent that the growing
interconnection of economies resulting from increasing international
flows of trade and capital brings more unison in business cycles, the
effects on demand fluctuations will be aggravated.

Forecasts of global supply-demand relationships are thus problematic.

But it may be rationally argued that the world supply of many basic
industrial chemicals will — from the standpoint of producers — too
often tend toward oversupply in the years ahead. Every developing
country wants to build its own chemical industry. Other things being
equal, more suppliers generally means tougher competition and a ten-
dency toward overcapacity. If so, as the number of producers grows, the
tendencies toward global oversupply will increase, and competition will
intensify. Perhaps aggravating this tendency, developing countries intent
on building their own chemical industries may not be guided solely by
supply-demand relationships and short-term rates of return on invest-
ment but instead may be tempted to continue to increase their domestic
production and to protect it from foreign competition.
In an ever more competitive global economy, a persisting global over-

supply of basic chemicals could perhaps undermine the U.S. industry’s
profits for several years, and average rates of return could decline.
Without strong profits and adequate rates of return, high levels of R&D
and P&E investments at home and abroad may be difficult to maintain.
U.S. Economic Performance
As noted above, the U.S. chemical industry’s profits and its international
competitiveness are substantially affected not just by U.S. economic
The single most performance but also by global supply-demand relationships that are set
important factor in the by trends and events in the world economy. Even so, the U.S. market for
U.S. chemical industry’s chemicals remains the world’s largest, and, notwithstanding the growing
importance of foreign markets, almost 85 percent of 1994 U.S. output
output and profitability
was sold to U.S. customers. The single most important factor in the U.S.
remains the state of the chemical industry’s output and profitability therefore remains the state
U.S. economy. of the U.S. economy. Fluctuations in economic growth rates particularly
affect the industrial and other chemical products segments, but all of the
chemical industry has a vital stake in the long-term performance of the
U.S. economy.
In addition, excepting pharmaceuticals, the chemical industry has a

particular interest in the overall trade performance of its largest domestic
customer. Other U.S. manufacturing industries provide the largest single
market for U.S. chemicals, purchasing almost half of the chemical
industry’s total output. But taken as a whole, the international competi-
tiveness of U.S. manufacturing has not been strong since the early 1980s.
The last U.S. manufactures trade surplus was in 1981. Excluding the

Figure 19. U.S. Chemical and Manufacturing

Trade, 1983–1994
chemical industry surplus, the 1994 U.S. manufactures trade deficit was
$145 billion, about 2.1 percent of U.S. GDP. The cumulative manufactures
trade deficit for the twelve years from 1983 through 1994 was $1.15
trillion despite cumulative chemicals trade surpluses that totaled $157
billion (Figure 19). Had the U.S. achieved balance in its manufactures
trade in recent years, the U.S. production of manufactured goods — and
the manufacturing sector ’s consumption of U.S.-produced chemicals —
would have been markedly higher. In a real sense then, large U.S. manu-
factures trade deficits represent significant sales losses to U.S. chemical
producers.
According to widely accepted economic theory, the continuing large U.S.

goods trade deficits manifest a low U.S. savings rate that in turn gener-
ates a need to import capital to finance government deficits and private
sector investment. But major private savings rate changes are likely to be
achieved only from significant and difficult-to-achieve changes in tax
laws and/or from equally difficult major reductions in government
deficits. Thus, large U.S. manufactures trade deficits, with their implicit
losses to U.S. chemical production, will likely continue for some time.

Figure 20. Production Growth in U.S. Chemical Industry

Production for Each 1 Percent GDP Growth
Notwithstanding continuing trade deficits, the near-term outlook for the

U.S. economy appears good. But cyclical downturns and their effects on
the U.S. demand for chemicals cannot be ruled out. Also, the sustainable
long-term noninflationary growth rate of the U.S. economy is generally
considered to be, at best, in the 2.5 to 3.0 percent range, well below the
growth rates expected for a number of developing countries.
The slowdown in Moreover, the U.S. market for chemicals has matured and will not likely
chemicals demand exhibit the rapid growth typical of earlier decades. During the 1960s each
growth relative to U.S. 1 percent of growth in U.S. GDP resulted in about 2.2 percent of U.S.
chemical industry output growth. In the 1970s it was 1.7 percent. During
GDP growth in large
the 1990s each 1 percent of GDP growth will likely generate about a 1.2
measure reflects the percent increase in U.S. chemicals output (Figure 20).
growing share of
“service” industries Why the diminishing chemicals-to-GDP growth relationship? Manufac-
that are less chemical turing and construction are two of the U.S. chemical industry’s largest
intensive, a trend customers. The slowdown in chemicals demand growth relative to U.S.
unlikely to change. GDP growth in large measure reflects these industries’ diminished
shares of U.S. GDP and the growing share of “service” industries that are
less chemical intensive, a trend unlikely to change. The discovery of
major new chemical industry products or new uses for existing products
could, of course, increase the ratio of chemicals output growth to U.S.

GDP growth. Significant increases in the ratio appear unlikely in the

foreseeable future, however.
Faced with a maturing domestic market, several chemical companies Continued growth in
sought increased growth and profitability during the 1980s by diversifi- size and profits typically
cation — often by acquiring companies that would broaden their product
requires expansion
lines. That strategy now appears to have been generally unsuccessful.
Indeed, the recent trend has been toward divesting operations “outside into global markets,
the core competencies” of a company. particularly fast-growing
developing country
“Restructuring” and “re-engineering” and various other terms cover markets.
continuing efforts to increase efficiency, productivity, and profits. But in a
world of rapid communications and fast technology transfer, efficiency
gains and product improvements from new technologies can soon be
copied by competitors. And, to the extent that efficiency gains involve
more or less arbitrary non-production personnel cuts, they cannot be
continued indefinitely. Continued growth in size and profits, therefore,
typically requires expansion into global markets, particularly fast-grow-
ing developing country markets.
World Economic Performance
Concurrent with maturing of the domestic market is the rapid growth in

many developing country markets and the resultant growth in world
chemical trade. Exports in 1994 were a record 15.1 percent of the chemi-
cal industry’s shipments, and the exports portion will likely continue to
increase. Moreover, increasing foreign production and competitive
strengths are reflected in a growing foreign penetration of the U.S.
market, with imports reaching a record 9.7 percent of U.S. shipments in
1994.
These factors and the major portion of the U.S. industry’s sales and
earnings that accrue from foreign investments point to a growing reli-
ance on foreign markets for chemical industry growth and profitability.
As noted earlier, profits of the capital-intensive industrial and other
chemical products parts of the industry are strongly affected by capacity
utilization rates and product prices. Strong global economic performance
will be required to increase the global demand for chemicals in parallel
with the expected growth of supplies. Slow global growth or a global
recession, however, may let supply significantly outrun demand, putting
pressure on profits. The future profitability of the U.S. chemical industry

will thus be increasingly dependent on foreign economic growth and the

resulting increases in demand for chemicals.
There will, of course, be major differences in the demand growth rates of

individual countries. Just as the demand for chemicals has matured in
the United States, so has it matured in other developed countries. While
demand and production will continue to increase in the United States,
Japan, the European Union, and other developed countries, growth there
will be slower than in many developing countries in Latin America and
Asia. Increasingly, a number of countries in those two regions will likely
provide the most rapid growth in both export and investment opportuni-
ties.
These actual and projected demand growth differences are shaping the
global marketing and investment strategies and decisions of both U.S.
chemical companies and companies in other major producer countries.
Investment decisions have always been difficult and uncertain in the
chemical industry; they are likely to be even more so in the future.
Access to Foreign Markets and Protection of Intellectual Property
As noted earlier, the current strong foreign investment position is one of

the major competitive strengths of the U.S. industry. Foreign investments
not only add significantly to parent company income through foreign
sales but also increase the parent company’s exports from the United
States. Looking ahead, foreign markets will become ever more important
to U.S. chemical producers, both for exports and as locations for invest-
ments in production facilities.
The growing importance of foreign markets — particularly those in

developing countries — underscores the importance of U.S. efforts to
improve access for U.S. goods exports and direct investments in foreign
markets. Completion of the GATT Uruguay round and the North Ameri-
can Free Trade Agreement provided major new opportunities for the
chemical industry. But full implementation of these agreements will take
several years and, even then, many barriers to U.S. trade and investment
and to the protection of intellectual property will remain. This is particu-
larly the case in a number of developing countries, some of which are
fast becoming major chemical producers. Continued progress in opening
access to exports and direct investments in these new markets is essential
to the future strength and international competitiveness of the U.S.
chemical industry.

Also particularly important is the protection of intellectual property —

the honoring of patents and copyrights by foreign producers. While this
protection is important to all of the science-based chemical industry, it is
particularly critical to the highly R&D-intensive pharmaceuticals indus-
try, whose high product development costs must often be recouped by
global sales over extended time periods.
Government Policies
Setting aside the near-term effects of business cycles, existing strengths

make the longer term outlook for U.S.-based chemicals production In large measure the
generally positive, perhaps as good as for any major U.S. manufacturing industry’s future will
industry. Indeed, at this point in time U.S.-based chemical R&D and
be determined by
production is generally competitive with that of the other major pro-
ducer countries. However, there will be many new competitors in the management’s ability
years ahead. Indeed, the greatest competitive threats may well come to anticipate and adapt
from production in countries that are not major producers today. to change.
Whatever may happen globally, the strengths and competitive advan-

tages of the U.S. chemical industry are many and will not fade quickly.
But in a fast-changing global economy, neither are they permanent or
immutable. In large measure the industry’s future will be determined by
management’s ability to anticipate and adapt to change. The industry’s
ability to achieve optimal allocations of investment capital between U.S.
and foreign investments, to maintain high levels of productive R&D, and
to meet changing global conditions with new products and processes
that are competitively priced will clearly be critical.
But in growing measure, the competitive position of the industry will

also be determined by a wide range of U.S. government policies. As
previously noted, improved access to foreign markets, including protec-
tion of intellectual property, is a necessary condition to future U.S.
chemical industry international competitiveness. But it is not a sufficient
condition. In a world of intensifying competition, improved access is of
little value if U.S.-based production and the products of U.S. research are
not price competitive in both U.S. and foreign markets. U.S. economic
and regulatory policies can and do significantly affect the costs and the
rewards of U.S.-based R&D and production. Indeed, as globalization of
the industry continues, the effects and importance of U.S. government
policies will become more and more important. In earlier decades, when
U.S. producers were often dominant, the effects of U.S. economic policies

usually did not significantly affect U.S. international competitiveness.

Cost increases could, for the most part, simply be passed on to buyers. In
this earlier era, the industry’s costs in large measure often determined its
prices.
But in a new, increasingly competitive world economy, U.S. producers

will be markedly less able to pass on cost increases that may result from
domestic economic and regulatory policies — cost increases that com-
petitors do not have to bear. Now, it has been said, prices often deter-
mine costs. That is, to remain competitive and to maintain performance
levels that satisfy stockholders, costs may have to be cut to levels set by
market conditions. But cost-cutting has its limits and some cost cutting
— for example, reducing investments in R&D and new P&E — though
good for short-term profits, may be bad for longer term competitiveness.
In this new era, U.S. economic policymaking must recognize that U.S.
manufacturing is no longer invincible — or even dominant — in world
markets and is no longer able to shrug off the effects of U.S. policies.
Today, the U.S. economy and the U.S. home market are much less insu-
lated from foreign competition than before.
U.S. policymaking does not always recognize that many U.S. industries
now compete in a world economy and that U.S. consumers draw from
global suppliers. For example, the implementation of U.S. antitrust laws
may discriminate in favor of foreign companies. Much of the foreign
investment in the U.S. chemical industry that has taken place has been
via acquisitions of existing U.S. assets by foreign companies. Many of
these acquisitions might have been completed by U.S. companies but for
antitrust laws designed to prevent unacceptable “concentration” of the
domestic industry in the hands of fewer U.S. companies.
In a global economy, however, the unintended consequence of such

restrictions may be to increase the global market power of foreign firms
and the degree of concentration in global markets. It is certainly not clear
in today’s global economy that this kind of antitrust enforcement ben-
efits U.S. consumers.

Environmental improvement regulatory measures have become ever

more costly. The costs of further improvements will often be even higher
and the benefits less certain. Greater environmental quality gains can be
made at lower costs to members of our society, while maintaining the
competitiveness of U.S. industry, by the consistent use of risk assess-
ments, risk prioritization, and cost-benefit analyses. These techniques
can be used to determine the societal costs and benefits of proposed
regulatory measures and to identify the largest gains that can be had
from the best use of our society’s limited resources.
Many chemical companies are now truly global. Many chemicals are
globally traded, and a growing number of firms operate around the
world and purchase globally. Investment capital will flow to the most
favorable production and distribution sites. Government economic and
social policies directly shape a country’s environment for production.
The profits and rates of return of industries that are capital-intensive,

R&D-intensive, subject to high degrees of government regulation, and
exposed to global competition are particularly vulnerable to the effects of
government economic and regulatory policies. Few U.S. industries meet
this description more perfectly than the chemical industry.
III. COMPETING IN A DYNAMIC WORLD ECONOMY
T he decade ahead is likely to be one of rapid changes for the chemical

industry. Some trends affecting the industry seem evident and basic.
But unanticipated political and economic events can wreak havoc with
the accuracy of visions of the future. Forecasts of the competitiveness
environment five to fifteen years hence are admittedly highly imperfect.
Nevertheless, in an ever-changing world, several key factors in addition
to the performance of the U.S. economy and the world economy will
almost certainly have important effects on the U.S. chemical industry.
These include the continuing advance of technology, environmental costs
and product restrictions, the availability of energy, and continuing
changes in the international geography of the consumption and produc-
tion of chemicals. In turn, these factors will shape the amounts of new
investment and the balance between domestic and foreign investments
by the U.S. chemical industry.

The Advance of Technology
As the accumulated body of knowledge and technology increases, the

pace of technological change is also expected to speed up. New informa-
tion technologies and global competitive pressures will likely drive a
R&D will become an more rapid rate of product and process innovations. In addition, pres-
even more important sures to conquer diseases and improve health, create new processes that
factor in determining reduce emissions, produce environmentally friendly products, and
the competitive strengths reduce production costs will almost certainly continue to grow. Given
of individual companies these health and environmental concerns and global competitive forces,
R&D will become an even more important factor in determining the
than it is today.
competitive strengths of individual companies than it is today.
Product and process advances will continue in every area of chemistry,

with particularly rapid change in biotechnologies and the creation of
new materials to be expected.
Advances in basic science in the fields of chemistry, biotechnology, and

material technology will continue to be the foundation for growth in the
chemical industry. The decade ahead will see new products and pro-
cesses arising from the intersection of chemical sciences, biology, and
physics, and integration with the enabling technologies of measurement
and computation. The industry will use advanced process science and
engineering to accelerate the commercialization of new technologies and
radically improve existing ones.
Chemical Science, and specifically chemical synthesis, will focus on

unique molecules and the improvement of chemistry and processes
presently used in the industry. The existing chemistries and processes
will be made more environmentally friendly and efficient. Catalysis will
continue to be a major driver for new routes to new and exciting mol-
ecules, and new processes. The new or unique molecules will broaden
the functionality of available chemicals and materials, enabling a more
rapid rate of product and process innovation.
Biotechnology will expand in its practical use in industry. Biocatalysts,

produced from enzymes, will provide routes to higher performance
products. Biochemical Engineering will advance in parallel with technol-
ogy. Efficient processes to convert biomass or purpose-grown feedstock
crops into useful products will develop. The process will be cost effective
for producing chemicals such as unique oils and polymers.

Material Science will also experience significant technology advances.

Predication of material properties from the molecular level through the
macroscopic level will lead to new synthesis techniques that will allow
the manipulation of material structures with enhanced products proper-
ties. Enhanced performance materials structures will result in categories
such as smart materials, higher temperature materials, biocompatible Whether by quantum
systems, and additives for polymers with reduced toxicity. advances or via a
continuing series of
Process Science and Engineering will provide technology advancements smaller discoveries,
resulting in reduced cycle times for product and process commercializa- strong R&D performances
tion, more economic and environmentally friendly processes and prod-
have long been an
ucts, supply chain integration and operations, agile manufacturing and
delivery capability, integration of process units into common control and important means by
operating schemes, and process technology in reactors, separations, and which the U.S. chemical
other operating units. industry has achieved
both growth rates above
Both Basic Science and Process Science and Engineering are supported by those of the U.S.
significant advances in enabling technology of Chemical Measurements economy as a whole and
and Computational Technology.
strong international
Advances in chemical measurements will allow more in-depth under- competitiveness.
standing that supports developments in chemistry, biotechnology, mate-
rial science, and process science and engineering. Advances in this area
will result in more precision, accuracy, and sensitivity. Measurements
that were sophisticated a few years ago will be robust enough to be used
routinely in a manufacturing setting with high reliability.
Advances in information and computational technology, with emphasis on

integrated and transactionally current information systems will enhance
operational effectiveness across the supply chains of the chemical indus-
try. It will enable the rapid development of new products and processes
through integration, modeling, and simulation. Computational technol-
ogy will be advanced for use in areas such as fluid dynamics, molecular
science, process modeling and optimization, and supply chain simulation.
Data sharing and collaboration will occur across geographic locations.
Basic science, coupled with process science and engineering, will provide
the chemical industry with its innovative growth. The enabling technol-
ogy of measurements and information/computation will play a lead role
in making it happen.
Quantum jumps in these and other technologies that would create whole
new ranges of products and major increases in the demand for basic

chemicals — advances comparable to the discovery of plastics — are

possible but not evident at this time.
But whether by quantum advances or via a continuing series of smaller

discoveries, strong R&D performances have long been an important means
by which the U.S. chemical industry has achieved both growth rates above
those of the U.S. economy as a whole and strong international competitive-
ness. R&D will continue to be a key factor in determining the industry’s
future. There are, however, significant differences in R&D spending trends
within the industry. Pharmaceuticals R&D spending now accounts for over
half (57 percent) of the chemical industry’s R&D spending, which totaled
$18.0 billion in 1994 (Table 5). Pharmaceuticals R&D reached $10.3 billion in
1994, nearly five times the 1981 level of $2.1 billion, advancing at a growth
rate far exceeding the pace of inflation. Over the 1981–94 period pharmaceu-
ticals R&D has ranged from 8.1 cents per sales dollar in 1981 to a high of
12.0 percent in 1992 and a 1994 rate of 11.5 percent.3
The dominance of pharmaceuticals in chemical industry R&D is quite

new. The industrial chemicals segment outspent pharmaceuticals in R&D
High R&D investment in earlier years. But by 1983 rapid pharmaceuticals increases put it in the
lead, and the margin has since continued to widen. R&D spending for
has produced remarkable
industrial chemicals rose from $2.4 billion in 1981 to $5.1 billion in 1994,
product advances that a 113 percent gain. Even so, it was only 28 percent of the industry total,
have benefited society down dramatically from the 46.0 percent share of 1981. Notwithstanding
and has been a major its share decline, industrial chemicals R&D spending has increased
factor in the relative to sales revenues — from 2.5 percent in 1981 to 4.6 percent in
pharmaceutical 1991 and 3.6 percent in 1994.
industry’s strong
R&D spending by the other chemical products group is relatively small,
profit performance.
14 percent of the industry total. Relative to sales, however, its R&D
spending has risen from 1.1 percent in 1981 to 2.0 percent in 1994.
The fast growth in pharmaceuticals R&D is part of “a virtuous circle.”

High R&D spending has both contributed to, and been facilitated by,
strong profit performance. High R&D investment has produced remark-
able product advances that have benefited society and has been a major
factor in the pharmaceutical industry’s strong profit performance. In
3
In a more narrowly defined sample, the 1994 annual survey of research-based
pharmaceutical companies conducted by the Pharmaceutical Research and
Manufacturers of America (PhRMA) reports that U.S. pharmaceutical research
and development expenditures were an estimated 19.2 percent of domestic
U.S. pharmaceutical sales plus exports for its member companies.

Table 5. Research and Development
Research and Development (R&D) Expenditures (In millions of dollars)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Total Chemicals 5,204 6,197 6,792 7,736 8,310 8,664 9,445 10,573 11,383 12,276 14,439 16,421 17,176 17,999
& Allied Products
Industrial 2,393 2,810 2,828 3,057 3,281 3,374 3,531 3,763 3,960 4,272 5,225 5,152 5,004 5,105
Chemicals
Pharmaceuticals 2,064 2,473 2,896 3,310 3,481 3,657 4,095 4,743 5,164 5,366 6,947 8,822 9,653 10,326
Other Chemical 747 914 1,068 1,369 1,548 1,633 1,819 2,067 2,259 2,638 2,267 2,447 2,519 2,568
& Allied Products
R&D Expenditures Relative to Revenues (Percent)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Average
Total Chemicals 2.8 3.3 3.4 3.7 4.1 4.2 4.2 4.0 4.1 4.3 4.8 5.2 5.3 5.0 4.5
& Allied Products
Industrial 2.5 3.2 3.0 3.1 4.1 4.1 3.7 3.3 3.6 3.8 4.6 4.2 4.1 3.6 3.9
Chemicals
Pharmaceuticals 8.1 9.2 10.0 10.7 9.9 9.7 9.5 10.3 10.1 9.1 10.3 12.0 11.8 11.5 10.4
Other Chemical 1.1 1.3 1.4 1.7 1.8 1.9 2.1 2.1 2.0 2.3 1.9 2.1 2.1 2.0 2.0
Products
Source: National Science Foundation, CMA Estimates
turn, strong profit performance has motivated further increases in its

R&D spending. The U.S. pharmaceutical industry leads the world in the
discovery, development, production, and sales of medicinal drugs and is
responsible for about one-half of all new patented drugs reaching the
global market since 1970. The U.S. also holds a commanding lead in
innovation in biotechnology medicines, surpassing both Japan and the
European Union in the number of biotechnology patents and marketed
products.4
Many of the resulting new pharmaceutical products have proven to be

highly cost-effective for society in improving human health. The lives of
an estimated 670,000 patients with coronary heart disease in the U.S.
were saved over the last two decades with the assistance of new cardio-
vascular medicines. Pharmaceuticals also helped to prevent nearly
4
Redwood, Heinz. Price Regulation and Pharmaceutical Research. (Suffolk,
England: Oldwicks Press). 1993.

500,000 stroke deaths and as many as 6 million nonfatal strokes in the

U.S. over this same period.5 At the same time, outpatient prescription
drugs as a percentage of national health expenditures declined from 7.4
percent in 1970 to 5.5 percent in 1993.6
This virtuous circle of expanding R&D leading to health and cost-

effectiveness advances will likely continue until broken by a reduction
in profits and rates of return from R&D that causes a slowdown or
reversal in the growth of R&D spending.
Such a reduction in rates of return on R&D could occur through the

natural working of market forces if spending rises to the point where
the pace of new discoveries simply does not merit further increases in
spending. This could happen in a situation where more and more spend-
ing is applied to projects with smaller and smaller potential returns until
the incremental additions to R&D costs begin to match or exceed the
resulting increases in profits. But the growth of R&D spending can also
be slowed — or even reversed — by government policies that reduce or
limit profits and rates of return from R&D. Indeed, there is ample evi-
dence to indicate that the caps placed on pharmaceutical prices by
several European governments have lowered returns and markedly
slowed R&D and the pace of new discoveries in several European Union
countries that formerly had strong pharmaceutical industries.7
Research in the industrial chemicals sector also provides breakthroughs

From a societal in a very wide range of products and processes that benefit society.
viewpoint, market Indeed, many advances in the formulation of new materials emanating
from basic chemical research have been critical to the progress of medical
forces alone are
science. But the profit payoffs to individual industrial chemical compa-
unlikely to produce nies have not been as large, perhaps because the advances typically make
optimum levels of small, incremental contributions to other products rather than providing
R&D. new breakthrough, patentable finished products for delivery directly to
the public. In any event, faced with more intensive global competition
and lower levels of profits and rates of return, industrial chemical pro-
5
Brown, Ruth E. and Luce, Bryan R. The Value of Pharmaceuticals: A Study of
Selected Conditions to Measure the Contribution of Pharmaceuticals to Health Status.
(Battelle Medical Technology and Policy Research Center, Washington, D.C.).
March 1990.
6
Health Care Financing Administration. Office of the Actuary, 1995.
7
U.S. International Trade Commission. Global Competitiveness of U.S. Advanced-
Technology Manufacturing Industries: Pharmaceuticals. (Report to the Committee
of Finance, U.S. Senate, on Investigation No. 332-302 Under Section 332(g) of
the Tariff Act of 1930). September 1991.

ducers have not expanded their R&D at rates comparable to pharmaceu-

tical industry growth.
It is widely accepted that the returns to society from R&D are generally There are some signs
greater than the private returns to those who perform it. From a societal
that a longer term
viewpoint, market forces alone are therefore unlikely to produce opti-
mum levels of R&D. If this is so, R&D should be generally encouraged
slowing of both the
by governments, not discouraged. There is, however, no practical way to growth in industrial
determine optimum levels of R&D or how government incentives might chemical R&D spending
reach such an optimum. and changes in research
strategies may well
Unfortunately, there are some signs that a longer term slowing of both occur.
the growth in industrial chemical R&D spending and changes in research
strategies may well occur. For example, development research may be
seen to offer quicker, more certain payoffs than basic research. In periods
of tough competition and lean profits, companies may put more empha-
sis on product development expected to yield quick payoffs. This in-
crease is typically at the expense of reduced attention to basic research
that is not related to immediate customer needs and is not expected to
produce profits in the near term.
There is evidence that such a move away from basic research may al-
ready be occurring. According to a 1994 CMA survey, its member compa-
nies (mostly industrial chemical producers) in 1995 planned to spend
some 74.5 percent of their R&D budgets in “development,” up from the
71.4 percent programmed for 1994 in the 1993 survey. Should this trend
continue to develop, the short-term effects on profitability and competi-
tiveness could be positive, but at the expense of foregone major funda-
mental breakthroughs and longer term profit and competitiveness gains.
In addition, there is concern that adapting to mounting environmental

and product substitution regulatory requirements drains off financial
and human R&D resources from other more productive uses. This could
particularly affect the industrial chemical sector and contribute to a
decline in international competitiveness.

Environmental Costs and Product Restrictions
A large, productive R&D establishment is a key component in the long-

term competitiveness of the U.S. chemical industry. But successful R&D
programs alone are not enough. U.S.-based chemical production must be
cost competitive. Rising environmental costs pose a threat to the com-
petitiveness of U.S. chemical production, particularly for the industrial
chemicals segment. Pollution abatement and control operating costs —
only a fraction of total environmental costs — have risen dramatically in
recent years and have become a significant drain on profits and rates of
return. Industrial chemical companies’ pollution abatement and control
costs rose from 1.9 cents per sales dollar in 1984 to 3.3 cents in 1993
(Figure 21). For the years 1989–93, total pollution abatement and control
costs for industrial chemicals companies of $14.3 billion slightly ex-
ceeded their $14.2 billion total after-tax profits.
Although the rising costs of environmental controls may not yet have
caused major plant shutdowns, environmental costs have been a key
factor in displacing the production of some chemicals — including a
number of dyes and organic chemicals used in dye manufacturing —
exclusively to non-U.S. locations.
Completing the implementation of existing regulations — examples

include the Clean Air Act Amendments of 1990 and corrective actions
under the Resource Conservation and Recovery Act — is likely to push
these pollution abatement and control costs still higher and lead to other
product migrations. In addition, the increasing difficulty and costs of
obtaining permits and satisfying myriad litigants and interest groups
may divert resources from new investments in U.S.-based production
and increase the portion of total investment moving to foreign locations.
New regulations would add to these burdens.
Proposals to ban or reduce the use of “toxic” chemicals embrace hun-

dreds of chemicals, including both basic organic and inorganic chemicals
essential to chemical processes. Advocates presume that “toxic” chemi-
cals can be made unnecessary — and hence eliminated — by the substi-
tution of benign, nontoxic chemicals into products and chemical pro-
cesses. But in fact, substitutions are often chemically impossible —
examples include the basic chemicals derived from crude oil and natural
gas — or are not economically viable.

Figure 21. Increasing Cost of Pollution

Abatement (Percent of Sales)
For example, the several hundred chemicals cited by activists for

“reduction in use” typically include several of the eight basic building
block organic chemicals derived from the refining of oil, and from natu-
ral gas and coal. Each of these basic building block chemicals, however,
is not only an inevitable product of the refining process but is also an
essential component for the production of thousands of other more
highly refined “downstream” chemicals that, in turn, are essential to
other chemicals and other products. Indeed, there could be no petro-
chemical industry — nor its consumer products — without these basic
building block chemicals.
Chlorine, the primary inorganic building block chemical, has also

been labeled as “toxic” and is the target of very active efforts by
several groups who are calling for bans on its production and use.
Chlorine and chlorinated compounds, however, are an essential
family of chemicals in perhaps 50 to 60 percent of modern chemistry
and are used in the production of about 85 percent of pharmaceuticals
(Figure 22).

Figure 22. The Chlorine Chemistry and Product Tree

Given the irreplaceable status of the chemicals involved, reductions in

the aggregate production or use of broad groups of “toxic” chemicals
from both organic and inorganic sources cannot be accomplished while
maintaining the growth in chemical industry production essential to
support the nation’s production, transportation, communication, and
living standards.
Were these movements to succeed in the United States, chemical produc-

tion would be forced to shift to other countries. Such reduction or elimi-
nation and the dislocation of production from the United States would
result in enormous costs to our society.
Gradual changes in the composition of chemical production are likely,

however. Continuing research, mostly sponsored by the chemical indus-
try, may identify some individual chemicals meriting tighter controls or
may even identify some chemicals that should not be manufactured or
used. And ongoing research may also discover some new alternative
products that are more environmentally friendly than products currently
in use. Over time, environmental factors and the advance of knowledge
may alter to some degree the composition and global locations of pro-
duction. But the changes resulting from continued expansion of science-
based knowledge about chemicals will be evolutionary and will not
displace modern chemical production and its benefits from the United
States.
A less dramatic, more subtle, but no less important threat to the

industry’s competitiveness is the future course of the nation’s efforts to
improve the environment through additional new regulations. The
industry sees itself at a crossroads. The American public and American
industry have spent billions of dollars for environmental improvement
— much of that spending by the chemical industry. The governmental
approach to environmental improvement has often been uncoordinated,
responding to each new concern without much consideration of the
benefits to be achieved and the costs to be borne.
Nevertheless, much has been accomplished. Emissions of chemicals to

the air, land, and water have been sharply reduced, pollution prevention
strategies have been adopted, and many other gains have been made.
Although there have been numerous mistakes and inefficiencies, air,
land, and water that were unquestionably polluted often offered obvious
cleanup targets, and the cleanup measures taken provided equally
apparent demonstrations of improvements.

Now, however, government and industry face a time when the easier,
less-costly innovations with the largest payoffs have largely been accom-
plished. The cost curve for added improvements gets steeper from here
on. Further pursuit of emission reductions and some other environmen-
tal goals will be increasingly costly but will yield smaller and smaller
gains of uncertain benefit to human health and the environment. More-
over, these increasing costs and declining returns will be encountered in
an era of an intensifying struggle among producers for world chemical
markets.
There is, of course, no identifiable “correct level” of spending for envi-

ronmental, health, and safety improvements through government regula-
tion and industry initiatives such as the Responsible Care® program. But
given the progressively higher costs of further regulatory measures, the
industry believes it is now critical — as never before — that careful
assessments be given to new environmental regulations that are in-
tended to continue the advances that have been made. The goal must be
Measures that yield a to focus scarce resources on the greatest threats and to preserve and
net benefit to our society enhance a high standard of environmental protection while providing
balance and efficiency.
and make effective use
of our society’s limited New measures should not be implemented absent a careful assessment
resources should be to establish that the societal benefits justify, or are at least reasonably
adopted, giving industry related to, the societal costs. These assessments should provide realistic
the maximum flexibility estimates of the expected economic and social benefits, including the
in deciding how to reductions of risks to human health and the environment. The assess-
achieve the objectives ments should also identify the offsetting costs — both economic and
social — to society. Measures that yield a net benefit to our society and
most efficiently.
make effective use of our society’s limited resources should be adopted,
giving industry the maximum flexibility in deciding how to achieve the
objectives most efficiently. Measures that do not yield a net benefit to our
society and do not make the most effective use of its limited resources
should not be adopted.
With few exceptions, environmental regulatory measures increase the

chemical industry’s operating costs and lower its ability to fund R&D
and P&E investments. In the end, of course, these environmental compli-
ance costs are not borne by “chemical companies” but inevitably are
passed on to individual members of our society in a variety of ways.
These include higher prices to consumers, lower wages to workers,
lower profits that lead to diminished investment, lower productivity
growth, and lessened international competitiveness for U.S.-based
production that, in turn, results in job displacements.

But when environmental measures do yield a cost-effective net benefit to

our society, the chemical industry must consider the resulting cost in-
creases and competitiveness effects to be a necessary part of the cost of
doing business. Moreover, environmental improvement is a global
problem. When the United States adopts sensible, cost-effective mea-
sures that benefit U.S. society, sooner or later, other nations will likely
adopt something similar, improving world standards while keeping
some degree of international parity in environmental costs. Governments
in competitor countries are, however, much less likely to follow a U.S.
lead that is costly but provides little or no net benefit to our society.
Moreover, it should be recognized that environmental advances do not

come solely from regulation by governments. The Responsible Care®
initiative, first developed by the Canadian chemical industry, is now
being implemented in 38 countries. The U.S. chemical industry and the
chemical industries of other major chemical producing countries are
active in advancing international acceptance of the Responsible Care®
initiative as an effective, efficient way to achieve international environ-
mental, health, and safety gains.
Effective, efficient use of limited resources to improve the environment Every member of the
is not just a matter of interest to the chemical industry and other U.S. economy has a stake in
industries. According to U.S. government data, the nation in 1993 spent
ensuring that the costs
about 1.72 percent of its GDP on pollution abatement and control — only
one part of environmental costs. Pollution abatement and control costs to our society of new
have been projected by EPA to reach 2.83 percent of GDP by the year environmental initiatives
2000, a significant portion of the nation’s total output of goods and are merited by the
services. Every member of the economy has a stake in ensuring that the benefits.
costs to our society of new environmental initiatives are merited by the
benefits.
The Availability of Energy
Chemicals is an energy-intensive industry. Global supplies of energy in

1995 are ample and prices are relatively low. A marked increase in world
energy prices relative to other goods and services would raise the costs
and prices of chemicals relative to other products, with resulting down-
ward pressures on chemical production and profits. Higher energy prices
would also increase the competitive advantages of those producers that
have access to inexpensive energy supplies and thus encourage addi-
tional chemical industry investment in energy-rich countries.

A dramatic increase in energy prices in the decade ahead cannot be ruled

out but does not now seem likely. There is, however, another energy-
related potential threat to U.S. chemical production because of fears
about “global warming.” There is worldwide concern that global tem-
peratures may be rising as a result of man’s activities. The potential
threat is from carbon dioxide emissions from the burning of fossil fuels
and from other emissions. Although it is uncertain that global warming
will actually occur, as a member of the UN Framework Convention on
Climate Change, the United States has pledged to reduce its “greenhouse
gas” emissions to 1990 levels by the year 2000. Moreover, should the
existence of a global warming problem and the linkage of fossil fuel
consumption to that problem be confirmed, it may be seen as necessary
to continue to control carbon emissions and perhaps to further reduce
them below 1990 levels.
The chemical industry is a major consumer of energy. Powering chemical

industry production processes, an activity that generates carbon emis-
sions, accounts for about 3.5 percent of total U.S. energy consumption.
Efforts to reduce U.S. carbon emissions would likely have significant
effects on U.S. chemical production. In a favorable domestic and world
economic climate, the volume of U.S. chemical industry output needed
to satisfy domestic and export needs should increase about 3 percent
annually, perhaps more if major new chemical-based materials are
developed. In recent years the industry has made significant gains in
energy efficiency, decreasing the energy consumed for fuel and power
per unit of output by about 40.1 percent over the 1974–94 period. But the
potential for further efficiency gains is limited. It is highly unlikely that
energy efficiency gains would be able to offset the increased energy
consumption required to power the chemical production increases
foreseen in an environment of good U.S. and world economic growth
rates.
Determined action to constrain or reduce U.S. energy consumption and

carbon emissions through taxes or by other means would clearly have
dramatic effects, significantly reducing U.S.-based chemicals production.
Unilateral U.S. action — or actions that involved only developed coun-
tries — would simply act to stymie reinvestment in the United States and
other developed countries and to accelerate the growth of investment
and production in developing countries, without achieving global emis-
sion reductions. But a difficult-to-achieve global agreement that included
developing countries in emission reduction goals would also likely
sharply alter both the amount and the distribution of global chemical
production.

Changing Geographic Composition of Production and

Consumption
The geography of world chemical consumption and production is chang-

ing rapidly. The markets for chemicals in major developed countries are
maturing. Economic growth in most developed countries is expected to
be only moderate, and their demand for chemicals is expected, on aver-
age, to grow only slightly faster than their relatively slow economic
growth rates. In contrast, many developing countries are industrializing
and growing rapidly. Moreover, the demand for chemicals in countries at
early stages of their economic development may increase at two or more
times their economic growth rates. Industrializing countries that may
experience rapid growth in consumption of chemicals include China,
India, Indonesia, the four “Asian Tigers” (South Korea, Taiwan,
Singapore, and Hong Kong) and several Latin American countries.
The needs of developing countries will provide growing export opportu-

nities for developed countries. But every developing country wants to
build its own chemical industry for a variety of reasons noted earlier.
This implies a continuing global diffusion of chemical production and
consumption among new producers. As more and more countries indus-
trialize, the shares of global chemical production and consumption held
by the current major producer countries — the United States, Western
Europe, Canada, and Japan — will likely decline.
In this kind of environment, how does the U.S. chemical industry —

defined as U.S.-based R&D and production, regardless of the nationality
of its ownership — survive, grow, and prosper? How can U.S.-based
R&D and production maintain strong global competitiveness?
U.S. Chemical Industry Competitiveness and Foreign Foreign investments

Investments have provided economies
of scale to the U.S.
An important — though seemingly anomalous — conclusion of this industry, allowing larger
study is that a major factor in the current competitiveness of the U.S.
chemical industry is its existing strong foreign investment position.
efficiency gains and
There is every indication that foreign investment will be even more R&D expenditures than
critical to the industry’s future competitiveness. Why is this so? How can would otherwise be
foreign investment aid the competitiveness of U.S.-based R&D and possible.
production?

As noted earlier, foreign investments now enhance U.S. competitiveness

by expanding export opportunities and by enlarging the sales and profits
base against which R&D and other fixed costs of U.S.-based companies
can be amortized. Foreign investments thus have provided economies of
scale to the U.S. industry, allowing larger efficiency gains and R&D
expenditures than would otherwise be possible.
What role will foreign investment play in the industry’s competitiveness

in the years ahead? Most of the foreign investments of U.S.-owned
chemical companies are now in other developed countries — Europe,
Canada, Japan — where chemical markets are maturing. The growth
potential of investments in these developed country markets is positive
but limited. Increased foreign investment in other new, fast-growing
markets is essential if the U.S. chemical industry is to maintain its future
competitiveness.
Increased foreign Looking to the future, the need for a geographic realignment of U.S.
company resources seems evident. More than three-fourths of the $51.3
investment in new,
billion total 1994 book value of the U.S. industry’s direct investments is
fast-growing markets in Europe, Canada, and Japan. Less than 15 per cent is in 11 fast-growing
is essential if the U.S. countries — Mexico, Brazil, Argentina, Venezuela, South Korea, Taiwan,
chemical industry is to China, India, Indonesia, Philippines, Thailand — with high economic
maintain its future growth potential that have some 2.8 billion people, more than half of the
competitiveness. world’s population.
A trend toward geographic reallocation of industry investment is already

evident. U.S.-based multinational chemical companies — those head-
quartered in the United States with affiliates in foreign countries —
continue to make the bulk of their new plant and equipment investments
at home. But changes in the distribution are occurring.
According to a 1994 CMA economic survey, the larger U.S.-based mem-

ber companies — those with annual U.S. sales over $1 billion — put 72.6
percent of 1994 P&E spending in the United States but expect that by 1999
the U.S. share will decline to 64.8 percent. The smaller companies — those
with annual sales less than $1 billion — put 86.9 percent of their 1994 P&E
spending in the U.S. but see that declining to 80.5 percent in 1999.
The CMA survey also shows a projected decline in the portion of total
new investment going to the more mature foreign markets — Western
Europe, Canada, Japan — and increases in the faster growing markets,
including the Asian NICs (Singapore, Taiwan, Hong Kong, South Korea),
other Asian countries, Eastern Europe and countries of the former Soviet

Union, and Latin America. For example, according to the 1994 CMA
economic survey, the larger U.S. companies (those with annual U.S. sales
over $1 billion) put 12.2 percent of their total 1994 investment in Europe
and 1.9 percent in Canada. But the survey indicates that by 1999, Europe
would get only 8.5 percent, and Canada only 1.4 percent, amounts that
may maintain existing output levels but probably would not support
major production increases in those markets.
Major multinational chemical producers headquartered in other coun-

tries will likely make similar investment reallocations. Because of the
maturing of their own domestic markets, they will also shift increasing
portions of their total investment in new P&E from domestic production
to foreign production. For example, many analysts feel that few, if any,
new petrochemical plants will be built in Europe. Instead, major Euro-
pean companies will put an increased portion of their investment in
foreign production locations and markets. In the past, the bulk of the
foreign investments by European producers was in other developed
countries, much of it in the United States. But in the future, the flow of
investment between major producer countries will likely decline in
relative importance. That is, increasing portions of the total foreign
investment of other major producer countries will go to developing
countries, declining portions to the home country and to the U.S. and
other developed country markets in which they are already invested.
New Foreign Investment Strategies and Problems
Continuing rapid industrialization and strong economic growth rates in As a result of population
many developing countries should cause world trade in chemicals to gains, industrialization,
continue to rise considerably faster than world chemical production, and rising per capita
perhaps twice or more as rapidly. This will provide export opportunities
consumption, the Asia-
for established producers. Export markets should be particularly strong
for specialty chemicals not yet produced in countries that are in the
Pacific demand for
earlier stages of developing their own chemical production capabilities. chemicals is expected
But foreign investments will likely be even more critical than exports to to grow at twice the rate
the longer term competitiveness of producers in developed countries. of developed country
markets.
How will foreign investments be allocated? How will choices be made?
What will be the limiting factors? Continuing the trends of recent years,
most analysts expect the highest economic growth rates — and the more
rapid growth of chemical needs — in Asian-Pacific countries. This rapid
growth is expected to result both from industrialization and from high
population growth rates. The population of the Asia-Pacific region, apart

from Japan, is expected to increase by 15 percent — by some 270 million

people — in the decade ending with the year 2000, more than double the
percentage growth for the United States and Western Europe. Moreover,
growth in the high consumption 20–40 age group will account for much
of Asia’s population increases. As a result of population gains, industrial-
ization, and rising per capita consumption, the Asia-Pacific demand for
chemicals is expected to grow at twice the rate of developed country
markets — perhaps significantly faster in some of these countries.
But the potential for more rapid economic growth in Latin American
countries is also high. In addition, there is significant economic recovery
potential in the Eastern European countries and the countries that for-
merly made up the Soviet Union.
Competition among established producers for export and investment

footholds in some of these developing country markets will likely grow.
The United States has strong economic and cultural ties with Latin
America and location advantages compared to some other producers.
These already existing U.S. export and investment advantages could be
further increased by expansions of the NAFTA to include countries in
Central and South America.
Japan may have similar cultural and locational advantages in exporting

to many developing Asian countries. To date, however, Japan’s large and
sophisticated chemical industry has not been as export-oriented as many
of its other manufacturing industries. Indeed, in 1994 only about 10
percent of Japan’s chemical production was exported, less than the 15
percent share exported by U.S. chemical manufacturers. In essence,
Japan’s chemical industry has focused primarily on supporting Japan’s
large manufacturing sector and on other domestic needs. Neither has the
Japanese chemical industry in the past been a very aggressive investor in
foreign markets. This may be changing, however.
Western European producers — particularly Germany — probably have

cultural and location advantages in Eastern Europe and countries of the
former Soviet Union and can be counted on to move aggressively to
export to and invest in those markets. European producers, however,
may be better able to serve growing needs of their eastern neighbors by
exports than can other suppliers. Recognizing this, they may choose to
use their limited direct investment capital primarily in other markets —
such as Asia — where they do not have similar export advantages.

Rapid growth and industrialization in many developing countries Competition may be

should provide not only many opportunities for goods exports and direct stiff among established
equity investments but will also create many opportunities for the sale
producers to be first with
and licensing of technology to foreign affiliates.
direct investments in the
Given these potential payoffs, competition may be stiff among estab- best new fast-growth
lished producers to be first with direct investments in the best new fast- markets.
growth markets. Such competition could lead to a capital shortfall for
individual companies. But today many developing countries pose high
economic and political risks. These risks and the many other barriers to
foreign investments (e.g., flawed legal systems, lack of intellectual
property protection, export requirements, capital repatriation restrictions,
etc.), rather than lack of capital are probably the more important re-
straints on increased investments in most developing countries.
Clearly, the risks and barriers associated with investing in many of these
new markets remain high. Political upheavals and cyclical downturns or
faulty economic policies could cut or reverse economic growth rates and
jeopardize reform movements, discouraging new foreign investments.
Certainly, uninterrupted political and economic advances by all — or
even most — of these growth markets are not likely. But over the longer
term, if confidence increases in the political and economic futures of
even some of the larger countries such as China, Indonesia, and India,
the scale of capital requirements could exceed anything seen before. In
such a climate both financial and human capital for U.S. chemical indus-
try investments would likely be strained and probably inadequate to fill
the needs of all the desirable projects.
Financial capital may be a particular problem. Funding expansions is

often difficult for capital-intensive industries. In recent years the growth
of U.S. chemical industry direct investment to all destinations abroad has
been quite modest — significantly slower than the growth of foreign
investments in the U.S. industry. The flow of new investment capital to
fast-growth developing countries has also been quite modest. For ex-
ample, of the $6.85 billion 1992–94 gain in the book value of foreign
chemical investments by U.S. companies, only $406 million was in South
America and, excluding Japan, the book value of chemical direct invest-
ments in Asia actually declined by $266 million.
Moreover, most of the rather modest growth in U.S. chemical industry

foreign direct investments that actually did occur was through rein-
vested earnings — reinvestments in the host country of the profits made
in that country. Indeed, over the seven years 1987 through 1993, rein-

vested earnings provided an amount equivalent to 84 percent of the net

increase in the book value of U.S. chemical industry foreign investments.
This heavy reliance on reinvested earnings tends to an expansion of
investments in existing foreign locations, rather than to investments in
new areas.
A shift of investment Given these tendencies, a shift of investment focus from developed to
focus from developed to developing countries will likely put increased demands on the reinvest-
ment of industry profits, including the profits from domestic operations.
developing countries will
It will likely also lead to more partnering with local foreign operations —
likely put increased more joint ventures, cooperation agreements, licensing, and other ar-
demands on the rangements that reduce the need for U.S. investment capital. These
reinvestment of industry arrangements, however, also reduce downstream control and returns.
profits, including the
profits from domestic The industry’s investment capital problems are likely to be particularly
operations. difficult for the highly capital-intensive industrial chemicals segment, which
in 1994 had $199,000 of fixed capital per employee, compared to $118,000 per
employee for pharmaceuticals and $109,000 for other chemical products.
New industrial chemical plant construction often requires very large
amounts of money — hundreds of millions of dollars — and several
years to complete. In addition, the return on investment has typically
been significantly lower for industrial chemicals than for pharmaceuticals.
Expanded foreign investments pose less of a potential problem for the

more R&D-intensive, more profitable pharmaceutical industry. Establish-
ing foreign production for pharmaceuticals is typically less costly than
construction of major industrial chemical production facilities. Foreign
investments are a relatively more efficient way to leverage the returns
from existing levels of pharmaceutical R&D.
To summarize, the growing portion of total plant and equipment invest-

ment that is being allocated to foreign locations need not signal a coming
decline in U.S. competitiveness. On the contrary, it seems critical to
maintaining the competitiveness of U.S.-based production. Indeed, in a
period of sustained global economic advance, the global opportunities
for foreign direct investments in chemical production facilities may well
substantially exceed the financial capital and other resources available to
established, developed country chemical companies. In that situation,
finding the financial and human capital to provide the same investment
footholds in the new, fast-growing markets that it now enjoys in the
more mature, developed country markets is likely to be one of the U.S.
chemical industry’s most difficult and critical problems. These limita-
tions are likely to particularly affect the capital-intensive, less profitable
industrial chemicals portion of the industry.

IV. M AJOR DETERMINANTS OF FUTURE

COMPETITIVENESS
T his paper seeks to identify the most important of the many interact
ing factors that will determine the future competitiveness of U.S.-
based chemicals R&D and production. In the description that follows,
the determining factors are separated into those that are “internal” —
under the control of individual companies — and those that are “exter-
nal” — those over which companies have no control. First, however, a
description of the characteristics of an internationally competitive U.S.
chemical industry in the period five to ten years hence is provided.
Defining “Success” in the Next Decade
In a world economy that is experiencing rapid change and a continued

“globalization” of production, what will likely be the indicators of an
“internationally competitive” U.S. chemical industry five to ten years
from now — in the years 2000 to 2005?
In a world of generally good economic growth rates, and one in which

many developing countries have high growth rates and are striving to
build their own production capabilities, the U.S. shares of world produc-
tion and world exports of chemicals will likely be smaller than today’s
shares. A major shift in the locus of world chemical production may
well now be occurring, with diminishing portions in Europe and North
America and rising portions in Asia and, perhaps, in South America. This
need not, however, be indicative of a loss of international competitive-
ness of U.S.-based production by 2005. Rather, a shift in the locus of
chemical manufacturing may be the inevitable result of the rapid growth
of the production and consumption of goods and services and the rise of
living standards in many developing countries — events that U.S. poli-
cies have helped to forge.
In that kind of environment, the U.S. chemical industry will be even

more globally oriented than it is today, and a strong, internationally
competitive U.S. chemical industry — defined as U.S.-based chemicals
R&D and production — would likely be evidenced by:
■ domestic production volume growth averaging around 3.0

percent annually, modestly above the rate of real GDP growth;
■ relatively stable total chemical industry employment, with

productivity gains roughly equal to production growth;

■ export growth of about 8 to 12 percent per annum, well above

world economic growth rates, but reflecting strong participation
in the growth of world chemical trade;
■ continued strong trade performance, with trade surpluses

somewhat above current levels and growing modestly;
■ exports and imports both rising percentages of total U.S.

industry shipments;
■ U.S. shares of world chemical exports and imports that, while

gradually declining, are declining in parallel;
■ strong levels of domestic P&E spending to support continued future

domestic productivity growth and output expansion, but
coupled with more rapidly rising amounts of investment in
foreign locations, particularly in markets with high growth
potential;
■ rising portions of total U.S. industry income from foreign

investments and the licensing of U.S. technology, resulting in
continued, modestly growing U.S. surpluses on chemical
industry “services” trade;
■ increasing expenditures for R&D, with the bulk of R&D

continuing to be performed in the United States;
■ appropriate balance between basic and applied research,

resulting in an enlarging stream of new products and processes
and continued U.S. technological leadership;
■ environmental costs that, while continuing to rise in dollar terms

to meet increasing environmental standards, level off and begin
to decline relative to sales; the decline relative to sales occurs as a
result of improved regulatory policies and processes and through
increased flexibility and cost-effectiveness allowed companies in
meeting environmental goals.
There is one additional indicator of a strong U.S. industry that is neces-

sary to achieving other key indicators:
■ profit levels and rates of return must be adequate to motivate the

required high levels of R&D and domestic investment, as well as to
provide the capital for growing amounts of foreign investments.

The U.S. chemical industry’s profitability and its future competitiveness The U.S. chemical
will in large measure be determined by its own decisions — by decisions industry’s profitability
on internal factors that are within the direct control of the industry. But and its future
its competitiveness will also be very much determined by the external
competitiveness will
environment — by factors that are not within its direct control.
in large measure be
determined by its own
Critical Industry Choices Affecting International decisions.
Competitiveness
Innumerable management choices made in thousands of U.S. companies

will in large measure shape the future competitiveness of the U.S. chemi-
cal industry. But a few factors seem particularly critical:
■ Industry growth strategies;
■ Costs of production;
■ P&E Investment amounts and locations; and
■ R&D amounts and strategies.
Growth Strategies
Faced with a maturing domestic market, some U.S. chemical companies

have sought growth by diversification — by acquiring other companies
to broaden their product lines and increase sales. Generally, the diversifi-
cation strategy failed, and the recent trend has been to sell off many
components of businesses not closely related to a company’s central
product line to allow management to concentrate on the company’s “core
competencies.” In an evermore competitive global economy, it seems
likely that this concentration on enhancing core competencies will
continue.
Major technological breakthroughs that result in large increases in the

total domestic consumption of chemicals could provide dramatic new
growth opportunities in the decade ahead, but do not seem likely. In the
absence of such technological breakthroughs, although individual com-
panies will battle for greater U.S. market share, the major source of future
growth for most companies — and the major source for the industry as a
whole — must be foreign markets. Such an expansion will be essential in
part to provide a growing revenue base over which to amortize the

increasing cost of the R&D that, in turn, is essential to develop the new
products and processes necessary to maintain international competitive-
ness.
In part, this expansion into foreign markets can be accomplished by a

growth of exports from the United States. In the past, some U.S. chemical
producers have looked on export markets primarily as outlets for excess
production when the U.S. economy was slow but neglected these mar-
kets when strong U.S. economic growth kept the domestic demand for
In today’s global economy, chemicals high. In today’s global economy, however, foreign markets
foreign markets cannot cannot be seen as residuals but must be part of long-term strategies.
be seen as residuals but But many large foreign markets cannot be adequately served simply by
must be part of long- exporting from the United States. For the most part, competing success-
fully in major foreign markets will require investments in production
term strategies.
facilities in those key markets; investments that, in turn, will enhance
exports from the United States. There is thus a seeming anomaly — a
large expansion of U.S. foreign investments is essential to sustained
strong U.S. export performance and to the continued competitiveness of
the U.S. chemical industry.
Shortfalls of financial and human capital will likely make full representa-
tion in new foreign markets difficult. This may lead to increased use of
joint ventures and various forms of cooperation agreements with compa-
nies in the host countries.
Costs of Production
There are many reasons to believe that competition will continue to

intensify in the years ahead. Global competition is already tough and the
technology and efficiency of producers in other developed countries
continue to improve. Moreover, with the rapid addition of new produc-
ers in developing countries, if global supplies expand more rapidly than
global demand, producers in those countries that have low-cost energy
supplies, governmental subsidies, or other forms of production incen-
tives will provide particularly difficult competition.
To survive, grow, and prosper in the global economy, the costs of U.S.-
based production will have to be favorable compared to producers
around the world. Only part of the costs of U.S.-based production are
controllable by individual companies. Many costs — taxes in many
forms, the cost of capital, costs of environmental controls — are deter-
mined by government or other external factors. But remaining a low-cost

producer nevertheless will require that companies make many decisions

correctly about those factors that are under their control. Surviving and
prospering will, for example, likely require continuing “restructuring” or
“re-engineering” to cut costs and increase profitability as well as to adapt
to changes in customer needs and to changing competition.
Restructuring in the form of people-cutting to achieve profit enhance-

ments can have strong immediate effects on profits. But personnel reduc-
tions cannot be pursued indefinitely. Moreover, other kinds of efficiency
gains usually can be copied by other producers and offer only temporary
competitiveness advantages. In today’s highly competitive environment,
adding greater value to the product than that added by competitors is
now a key strategy goal of many companies. R&D that provides new
products and processes is one route to adding greater value. Another is
evaluating and adapting to changes in the market place. Change is, of
course, not new to the chemical industry. But “globalization” implies
increased competition that generates a more rapid pace of change.
Moreover, it requires attention and response to global — not just domes-
tic — changes in customer demands and competitor strategies.
Making the Right Investment Amount and Location Choices
Making the right investment choices — decisions about timing and

amounts, choices about adding new capacity vs. modernizing existing
capacity, and many other investment choices — have always been criti-
cal. Typically, the industry has invested when it had money — when
profits were high. Many companies thus invested at the same time, with
resulting capacity growth subsequently outpacing demand. But now the
choices also must often include the appropriate profit-maximizing split
between domestic and foreign investment. Difficult decisions must also
be made about the alternative locations of foreign investments. Some
foreign countries offer potentially higher rates of return but also may
involve larger economic and political risks than investments in the
United States or in other foreign locations. Again, the focus of invest-
ment strategies must be global — not just domestic. For some companies
this may require new information and skills.
Making the Right R&D Amount and Composition Choices
High levels of R&D investment have made the pharmaceutical segment

of the U.S. chemical industry a profitable one and a world leader in

health-improving technical breakthroughs that have been cost-effective

for U.S. society. High levels of pharmaceutical R&D will continue as long
as rates of return are sufficient. But a nonstop flow of new products and
processes is also essential to continued strength of the other segments of
the U.S. chemical industry.
Ability to fund the Ability to fund the escalating costs of R&D at levels necessary to retain
escalating costs of R&D industry leadership is ultimately determined by industry profitability. R&D
at levels necessary to spending is a form of investment and, as with investments in plant and
equipment, R&D budgets inevitably are affected by profits. Profit shortfalls
retain industry
put downward pressure on total R&D budgets and tend to press the balance
leadership is ultimately of spending away from “pure” or fundamental research that offers large but
determined by industry uncertain long-term payoffs and toward “applied” research that offers
profitability. less uncertainty in return for smaller, quicker results. Rising R&D costs may
also provide an important motivation for mergers and joint ventures and
other forms of cooperative arrangements among companies. The result
may be fewer but larger companies and perhaps some reduction in the
total amount of R&D resources as a result of the consolidation.
None of the three major segments of the U.S. chemical industry is likely
to remain internationally competitive without the technology leadership
provided by sustained global R&D leadership. But while strong R&D
performance is a necessary condition to continued competitiveness of the
U.S. chemical industry, it is not a sufficient condition. New technologies
are now easily transferred to foreign production locations. At best, new
technology typically provides only a brief advantage to production in the
technology-originating country. Strong R&D performance alone will not
sustain production in a country that has an unfavorable production cost
environment.
External Factors Determining Chemical Industry

Competitiveness
The ability of individual U.S. producers to compete successfully in a

global economy will be only partly determined by internal factors —
by individual company decisions. Many external factors beyond
management’s control will also be critical. These include:
■ the domestic U.S. economy and U.S. economic policies;
■ the world economy;
■ export and investment access to foreign markets;

■ global protection for intellectual property; and
■ U.S. regulatory policies.
The Domestic Economy and U.S. Policies
Because the United States will remain its single largest market, strong
sustained economic growth in the United States and a resurgence of the
competitiveness of U.S. manufacturing are both important to the U.S.
chemical industry. Economic policies that promote those goals are there-
fore of great importance to the industry.
Domestic economic policies will also directly influence the competitive-

ness of U.S.-based chemicals production in both U.S. and foreign mar-
kets. For example, energy and tax policies will do much to affect U.S.
production costs, international competitiveness, profits, and rates of
return on investments in the United States and, therefore, company
choices between investments in U.S.- and foreign-based production.
Most important, however, is the overall business climate that results

from the web of government laws and policies. Only a profitable U.S.
chemical industry can generate the capital needed to fund the needed
R&D and domestic and foreign investment. Tax laws have particularly
powerful effects on the amounts and location of new investments and
R&D spending. Fundamental but difficult-to-achieve changes in U.S. tax
laws — changes that, for example, would eliminate the double taxation
of corporate earnings and raise U.S. savings rates — would do much to
stimulate the new investment and R&D spending required to maintain
the competitiveness of U.S.-based production in an increasingly competi-
tive global economy.
The World Economy
Increasingly, success of the U.S. chemical industry will be determined by

its performance in the global marketplace. A rapidly growing world
economy will aid the competitiveness of U.S.-based production. Growth
that raises global demand in rough parallel with the growth of supplies
will help to maintain profitability at levels that facilitate additional
foreign investment. Good global growth rates will also encourage the
reduction of remaining barriers to trade and investment.

Export and Investment Access to Foreign Markets
As foreign markets become relatively more important to the success of

the domestic industry, the importance of access to foreign markets will
increase. Despite recent gains, many impediments to exports and invest-
ments remain — particularly in developing countries. Continued lower-
ing of these barriers, achieved through global, regional, or bilateral
agreements, is essential to the continued strength of the U.S. chemical
industry.
Global Protection for Intellectual Property
As the science and In an intensely competitive world, successful R&D resulting in a con-
technology edge of U.S. tinuing stream of new products is essential to U.S. competitiveness. But
the returns from R&D are reduced by unlicensed copying of innovative
companies becomes more
products and processes — the theft of intellectual property that was
and more important to generated at high costs to those who initially performed the R&D. As
their international com- more countries increase their chemical production, the potential for
petitiveness, adequate intellectual property theft will increase. As the science and technology
global protection of edge of U.S. companies becomes more and more important to their
intellectual property international competitiveness, adequate global protection of intellectual
will become ever more property will become ever more critical.
critical.
U.S. Regulatory Policies
As global competition becomes tougher and tougher, the costs of envi-

ronmental and other U.S. regulatory policies will become more impor-
tant. The burden of environmental costs has become particularly signifi-
cant for the industrial chemicals segment of the chemical industry and
weighs heavily on profits and investment decisions. Continuation of the
trend of increases in environmental costs relative to sales will further
decrease the competitiveness of U.S.-based production and further
increase the portion of total investment allocated to foreign production,
particularly in the case of industrial chemicals.
In the pharmaceuticals segment, compliance with increased regulatory

requirements has lengthened the average drug development and ap-
proval time, increasing costs and delaying the introduction of beneficial
new products. The United States continues to lag behind other countries
in the timing of new drug approvals.

Rising regulatory costs have other effects as well. Beyond measured

dollar costs, there are also opportunity costs in regulatory compliance —
for example, diversions of limited company resources from other P&E
and R&D investments.
Two steps are essential to achieve the greatest environmental gains while When additional
minimizing the effects on the competitiveness of domestic investment
and production. First, ensure that the economic and social benefits of
regulation is merited by
new regulations to our society exceed the economic and social costs. expected net gains to
Second, when additional regulation is merited by expected net gains to society, avoid the use of
society, avoid the use of “command and control” regulations that specify “command and control”
how goals must be met. Instead, allow industry maximum flexibility in regulations that specify
determining how to meet the standards set by regulations. This will how goals must be met.
enhance the efficiency of environmental improvement, minimize its cost
to our society, and help to maintain the international competitiveness of
U.S.-based chemical R&D and production.
Peering into the Future
The chemical industry is one of the nation’s strongest and most interna-
tionally competitive industries. Large accumulated investments in
technology and production facilities and several other major strengths
ensure that U.S.-based chemical R&D and production have significant
staying power and will not erode quickly.
The world is changing rapidly, however, and given the essential role of
chemicals in the production of modern goods and services, every devel-
oping nation gives high priority to building its own chemical industry.
Thus, the “globalization” of the chemical industry — the international
diversification of chemical R&D and production — will continue. As a
result, the competition for U.S. and world markets will continue to
intensify and the pace of technological change will likely increase. In
such an environment, complacency or self-satisfaction are likely preludes
to decline, if not demise. With the rapid industrialization of many devel-
oping economies, chemical production in the United States and other
current major producer countries will almost certainly be a smaller
portion of total world production ten years from now than it is today.
How much smaller is, however, a key question. A modestly declining
U.S. portion of world chemical production and trade need not signal a
decline in U.S. competitiveness but may simply represent a smaller U.S.
piece of a bigger world production and consumption pie, with larger

production and consumption for the United States as well as its competi-
tors.
To survive and grow, major U.S. and foreign chemical companies will
have to compete globally, selling — and often investing and producing
— in markets around the world. Increasingly, the United States will be
competing with other countries to host chemical R&D and production.
The benefits of an internationally competitive U.S. chemical industry to
the U.S. economy make it critical to keep the industry strong. In an era of
tightening competition, the margin for error in both company decisions
and government policies will be narrower than ever before.

BIBLIOGRAPHY
Brown, Ruth E. and Luce, Bryan R. The Value of Pharmaceuticals: A Study of
Selected Conditions to Measure the Contribution of Pharmaceuticals to Health
Status. (Battelle Medical Technology and Policy Research Center, Wash-
ington, DC). March 1990.
Dimes, Joseph et al. New Drug Development in the United States from
1963–1964. Clinical Pharmacology and Therapeutics (55) 609–622, 1994.
Health Care Financing Administration. Office of the Actuary, 1995.
Redwood, Heinz. Price Regulation and Pharmaceutical Research. (Suffolk,

England: Oldwicks Press). 1993.
U.S. International Trade Commission. Global Competitiveness of U.S.

Advanced-Technology Manufacturing Industries: Pharmaceuticals. (Report to
the Committee of Finance, U.S. Senate, on Investigation No. 332-302
Under Section 332(g) of the Tariff Act of 1930). September 1991.

Chemical Sector Analysis

Uploaded by

Copyright:

Available Formats

Chemical Sector Analysis

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chemical Sector Analysis

Uploaded by

Copyright:

Available Formats

OFFICE OF TECHNOLOGY POLICY

MEETING THE CHALLENGE:

THE CHEMICAL INDUSTRY

Dr. Allen J. Lenz

Dr. John Lafrance

U.S. Department of Commerce

The U.S. Chemical Industry 1

EXECUTIVE SUMMARY .......................................................................... 9

I. INDUSTRY CONDITION ......................................................................... 13

II. FORCES SHAPING THE INDUSTRY ........................................................ 47

III. COMPETING IN A DYNAMIC WORLD ECONOMY ................................. 59

The U.S. Chemical Industry 3

IV. MAJOR DETERMINANTS OF FUTURE COMPETITIVENESS ...................... 79

4 The U.S. Chemical Industry

F or more than a decade, there has been widespread and increasing

The Office of Technology Policy commissioned the series, “Meeting the

The U.S. Chemical Industry 5

Second, to remain competitive in this global industry, chemical manufac-

■ lowering of trade barriers;

■ access to, and protection for, investments in developing

■ protection of intellectual property; and

■ maintenance of a climate conducive to innovation, including a

6 The U.S. Chemical Industry

A s a part of the fact-finding process leading to the publication of this

The roundtable was chaired jointly by Commerce and CMA.

The cochairs were:

The industry representatives in attendance were:

In addition, the following individuals generously contributed their

The U.S. Chemical Industry 7

Roger E. Shamel, Consulting Resources Corporation

The Department of Commerce gratefully acknowledges the participation

8 The U.S. Chemical Industry

The Chemical Industry Today

T he U.S. chemical industry is vital to the U.S. economy. It produces 1.9

Most importantly, chemicals is a “keystone” industry — one critical to

Critical to the future competitiveness of the U.S. chemical industry will

As the chemical markets throughout the developed world mature,

(1) Many important markets cannot be served adequately or

The U.S. Chemical Industry 9

(2) Producing some products in a foreign market opens the door to

Rather, a shift in the locus of chemical manufacturing may be the inevi-

Internal and External Factors Affecting Competitiveness

Individual companies’ decisions, or internal factors, include growth

■ U.S. economic and trade policies;

■ changing international political and economic conditions;

■ export and investment access to foreign markets;

10 The U.S. Chemical Industry

■ global protection for intellectual property; and

■ U.S. regulatory policies.

The U.S. Chemical Industry 11

12 The U.S. Chemical Industry

Structure and Characteristics of the Industry

T he U.S. chemical industry is a vital element of the U.S. economy.1 The

■ a “keystone” or enabling industry, critical to the global

■ huge, high-tech, and dynamic;

■ a global industry; and

■ capital-intensive and environmentally committed.

The U.S. Chemical Industry 13

products are used by other chemical producers to make other chemicals